Getting your first employees on payroll is an exciting step for you, as a business owner. You are expanding and need additional help to service your clients. Once you get payroll started, you realize there are extra costs associated with it. You probably first thought, I can afford to pay an employee $30,000 a year to help me out in my business. So, you budgeted out $30,000 a year to cover the cost of your new employee. Then you realize the payroll company sent you a quarterly tax bill for an additional $1,500 that you weren’t expecting for matching social security, Medicare, and FUTA taxes as the employer. Your business is just scrapping by and the next thing you know you have another bill due the next quarter for another $1,500 and you have no way to pay it. After a couple quarters go by, your bill with the IRS is growing and you are probably asking yourself, “I am having trouble paying my payroll taxes, can I get some relief?” In this article I am going to discuss what happens if you don’t pay or don’t file your payroll taxes on time and if you find yourself in debt with the IRS because of payroll taxes, how to settle your payroll taxes.
The situation I described above is quite common for new small businesses who are starting out. If that sounds like your situation, know that you are not alone. When you are not able to pay your payroll taxes on time the IRS does not look to kindly upon it and they assess serious penalties that can quickly make a $1,500 bill become $3,000 bill, if it is not addressed in a timely manner. The IRS is very aggressive to collect on these payroll taxes because they are part of the employee’s wages. Once the employee works those hours, they consider those dollars their property. If you fail to make the deposit on time the penalties are swift and quick. According to Internal Revenue Manual 20.1.4 it states, they will fine you if you are one day late and the fines go up significantly each week the payment is late. Look at the table below from IRS publication 3151 to see how the penalties go up significantly on a $3,000 deposit in just 16 days after the deposit was due.
Once the cycle of paying late is stated you can find yourself in hole quick. So do your best as business owner to make sure your deposits are on time as best as you can to avoid these penalties. If you do find yourself in a hole that is too large to get out of, know there are some options for you as a business owner available to you to help. I will discuss them later in this article.
Failing to make a deposit has some large penalties, but if you don’t file your payroll taxes and don’t make a deposit you can find yourself in a hole that you can’t get out of in just a couple of missed filings and missed deposits. If you failed to file your payroll taxes, you will pay a 5% penalty of the tax due each month the payroll tax return is late up to 25%. That means if you are 5 months late on a $1,500 deposit, you will owe an additional $375 penalty on top of what you owe and interest. When you don’t file your payroll taxes and do not make payroll tax deposit it is easy to owe close to double what you should have paid in 5 months. Since the deposits are considered the employees property, the IRS will quickly bring on collection and will want to put liens on your assets and levy any assets they can find of value in a short amount of time. On top of that, if the bill gets large enough, they will also want to put you in jail.
These holes are easy to get trapped in if your business is going through a rough time in the economy or business isn’t going the way you have planned. That is why the IRS has put in place some programs to help you get your business back in good standing and help you pay your debt. The first thing program available to you is to set up an Installment Agreement with the IRS. This requires you to file all the payroll tax returns that are past due. From there, you will pay off the amount owed in monthly payments. This is an option for business who had a bad month, got behind and business profits will be expanding or going back to previous levels where you were able to cover the taxes that was owed. The next option is setting up a Partial Installment Agreement, you should seek a professional for help to determine your eligibility because you will need to accurately be able to demonstrate the financial outlook of your business and provide the IRS with supporting documentation. Hiring a Enrolled Agent or a Tax Resolution Specialist, works in your favor because they might be even able to prove the income of the business will warrant it to put your case into Currently Not Collectible status, which will stop collection activity because you have demonstrated your inability to pay. The last program the IRS has is called an Offer in Compromise, this allows you to settle the debt for a fixed amount, paid over 6 months or 2 years. I recommend hiring an Enrolled Agent or Tax Resolution Specialist at Taxes Made EZ in all these cases because we will be able to calculate and demonstrate your ability to pay. You will want to look for someone who will first calculate your ability to pay to then determine which program is the most appropriate for your situation. By doing so, will increase your chance of your offer or agreement being accepted by the IRS and stopping the collection activity by the IRS. If you would like to setup a Free Consultation click the link here or call our office at (856)232-0958 to schedule an appointment.