If you operate a business that collects payroll taxes from employees, here’s a warning: Regardless of what your corporate financial situation is, don’t borrow from the withholding tax fund. If that money isn’t there when it’s due, Uncle Sam loses any sense of humor he might have.
Company owners and executives facing a cash flow crunch are sometimes tempted to dip into payroll tax withheld from employees. They think: “I’ll send the money in later when it comes in from another source.” Bad idea!
If the due date arrives and the cash isn’t there, the IRS will crack down hard. In fact, from the government’s perspective, company officials who borrow from payroll taxes are thieves. That money belongs to their employees and is meant to stay in a trust fund to pay income taxes, Social Security and Medicare.
And the corporate veil won’t shield corporate officers in this instance. Unlike other liabilities that a corporation or limited liability company may have, business owners and executives can’t escape personal liability for payroll tax debts.
Let’s say your company has five corporate officers and $100,000 in unpaid trust money. The IRS has to decide who willfully failed to make the payments. Frequently, the government goes after the one who is the easiest to collect from. One corporate officer might end up paying the whole $100,000 because the other four have fled.
If there isn’t enough money to pay the bill, the IRS can attach your business bank accounts or assets. If there’s still a shortfall, the IRS can get a judge to shut you down, seize your assets and auction them off. The IRS wants every cent.
And there’s more bad news: Even if your firm files for bankruptcy, the debt is not dischargeable.
Will the government send violators to jail? Not in most instances. But if the IRS sees a pattern of repeated violations, it can launch a criminal investigation, which could lead to prison.
The repercussions can spread beyond the company. There are legal precedents that allow the IRS to collect from, say, banks and financial institutions that lend you money to pay those taxes. And the agency can go after partners and other corporate executives, even if they weren’t actively involved in running the company.
The easiest way out of a payroll mess is avoid getting into one in the first place. If you’re involved in a small or medium-sized business, it can be a good idea to hire an outside service to handle payroll duties. A good payroll service provider relieves you of an enormous burden by cutting the checks, making the deductions, taking care of the tax payments and handling recordkeeping. Even so, the company (not the payroll firm) is ultimately responsible, so if you hire one, keep communication open.