Are You Up-To-Date On Filing Payroll Taxes? If Not, Be Forewarned of the Steep Consequences
Federal tax authorities take withholding and remission of payroll taxes from employee paychecks very seriously. Business owners occasionally attempt to forestall business failure by using money withheld from employee wages for federal income and employment taxes to fund operations rather than remitting it to the Internal Revenue Service (IRS). The results in these situations are usually disastrous.
It’s against the law for employers to use money from payroll taxes to pay operating expenses. The money collected from employee paychecks for payroll taxes is not considered to belong to the business. Since it is employee money that has been diverted, penalties from the IRS are severe. Some business owners think that if they fall behind on payroll tax remittances one quarter they can catch up next quarter, but in addition to this being illegal, it hardly ever works. Here are some of the risks you face if you don’t stay current with your payroll taxes.
The IRS Will Seek Recovery of Unpaid Payroll Taxes
The most obvious problem with diverting money collected for payroll taxes to other purposes is that the IRS will seek to recover it, along with interest and penalties. To manage payroll properly, these taxes need to be turned in, and not held back in an attempt to keep a business afloat.
Individuals, and Not Just the Business, May Be Held Liable
The IRS is also authorized to recover non-remitted payroll taxes directly from the business’s owner(s) and any officers of the business who were responsible for collecting and paying payroll taxes. This is known as the Trust Fund Responsible Person Penalty (TFRP). The collected taxes are referred to by the IRS as “trust fund taxes” because the company holds the employee’s money in trust until it makes its federal tax deposit. Those who can be held personally responsible under the TFRP include:
• Officers or employees of a corporation
• Partners or employees of partnerships
• Corporate directors or shareholders
• Trustees or board members of nonprofit organizations
• Persons with authority to direct fund disbursement
• Third party corporations or payers
• Payroll service providers (PSPs) or responsible parties within them
• PEO companies or responsible parties within them
• Responsible parties within clients of PSPs or PEOs
Liability Cannot Be Discharged Through Bankruptcy
If a business owner, officer, or other liable party goes through bankruptcy, unpaid tax obligations under the TFRP cannot be discharged through bankruptcy. The financial obligation upon this person remains until it is paid in full along with interest and penalties, which can be substantial.
Diverting Payroll Tax Money Generally Leads to Business Failure
In the first place, when a company is inept to manage payroll to the degree that it needs collected payroll taxes to keep the business going, the business is already in serious trouble. Once the IRS seeks to recover that money, along with penalties, and goes after responsible individuals under the TFRP, there is little to no hope that the business can recover.
Choose Your Payroll Specialist Carefully
If your business uses a third party payroll specialist, it’s critical that you thoroughly vet this provider, or you could find yourself in serious trouble with the IRS. Any third party you hire to manage payroll should be properly bonded to ensure all tax funds advanced to that third party are held in a separate trust fund.
There have been cases of outsourced payroll specialists co-mingling funds from multiple small business owner clients and ultimately failing to submit the proper payroll taxes. When that happens, the small business owner still owes the taxes as well as any resulting penalties and would have to seek recovery of damages from the third party payroll specialist afterward.
Choose the payroll company or PEO company you intend to handle your payroll tax remittance carefully, or you could face serious consequences. SourceOne Partners is a PEO specialist that can help you select the right PEO company at the best possible rate, so you can focus on your core business processes while reducing your risks. We have locations in South Florida and New Jersey to help you enjoy the many benefits of outsourcing payroll and other HR functions affordably, so you can be confident your payroll and payroll taxes are being managed correctly. Call us at 561-674-0748 or contact us online to get help today.