Whether you own a small business or not we all dread the
IRS. They always seem to want more money and if you fail to
pay them or pay them late they'll penalize you straight
into the poor house. But as a small business owner your
worries about the IRS are compounded by the fact that you
may now or in the future have employees to deal with also.
With employees comes more taxes to pay and returns to file.
It seems to be never ending. Death and taxes as they say
are the only two inevitables in life. Oh how true. But
besides having to pay those taxes and file those returns
there are a couple of other stipulations that also come
with those responsibilities that you may not be aware of.
For those of you that are new to running a business and
having employees I'll give a quick rundown of how employee
taxes work. Once you opened your doors and started doing
business you put yourself in position to pay payroll taxes.
When you hire your first employee you'll be responsible for
witholding taxes from checks, sending in those taxes to the
IRS, filing 941 quarterly tax returns, W-3 yearly returns,
and issuing W-2's.
What you might not realize is just how far the IRS will go
when holding you responsible for those taxes. A
responsibility that can extend past even the closure of the
business. Of course paying the taxes late will result in
some hefty penalties. And as the number of employees in
your business grows the larger your tax bill becomes.
Because not only do you have to send in the taxes you
withheld but you have to pay the matching taxes as well.
And as your tax bill grows the IRS will require you to send
those tax payments in more often. You'll go from paying on
a quarterly basis to a monthly basis, down to a biweekly
time frame. So as your tax burden grows the amount of time
your given between payments shortens up by a lot.
Not that you can't handle all that pressure though right?
Well as if that wasn't enough we have one more piece of
good news for you. Even if your business was to go bankrupt
and you still owed taxes you can be held personally liable
by the IRS. The bankruptcy court won't necessarily protect
you from having to pay those taxes.
I know of a case a few years ago about a small business
owner that ran into such a problem. Due to cash flow
problems trouble arose in paying bills. Eventually the
trouble extended to paying the payroll taxes on time.
Finally the owner was forced to file for bankruptcy
protection and close the doors. Once the paperwork was
filed the bankruptcy court took control of all the assets.
As there wasn't enough money in the bank account to pay the
taxes in full anyway they went unpaid and were listed as
the top creditor in the bankruptcy court filing. The
problem though seems to be the IRS bureaucracy. You see the
court notifies creditors of the bankruptcy and requires
them to file a claim. If they don't then they cannot
receive any of the proceeds from the sale of assets. Now
since the IRS was owed taxes they are supposed to receive
all the proceeds up to the point of the taxes being paid.
But they are still just a creditor and must file a claim.
In this case no claim was filed. Most likely the court
paperwork was lost in the system.
So what does the IRS do? They hold the person that signs
the 941 tax returns responsible. In this case it was to the
tune of about $28,000.00. Now this could have been avoided
if the taxes had been paid before the court took possession
of the company but of course the owner didn't have the
means to pay anyway. There is a silver lining to the story
though. The taxman that is normally the big bad bully in
most cases was not here. Besides needing to provide copies
of the bankruptcy paperwork and some other documents the
IRS allows you to show whether you actually have the
ability to pay the amount back yourself. Due to the fact
you just filed bankruptcy and most likely lost your own
livelyhood you may not have to pay any of it. Of course
each situation is different .
The main thing to learn here is that you need to be aware
of your responsibilities as an owner when it comes to
payroll taxes. The consequences of not knowing or
fulfilling your obligations could ruin not only your
business but you personally.
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Cash Miller is an experienced entrepreneur and speaker who
has spent over a decade as a small business owner. His
years of experience in small business cover such topics as
planning, management, marketing, human resources,
ecommerce, and taxation. If you are looking for more
information on this subject and others related to starting
and running a small business you can visit his website at
http://www.SmallBusinessDelivered.com
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