You might be an entrepreneur if…you’ve “borrowed” money from the IRS by not paying your payroll taxes so that you have enough money to pay your employees.
I guess you could say I like knowing where the limits are. How long can I go without making my loan payment before they refer me to the credit division of the bank? How long can I resist going to the bathroom before I cause permanent damage? And how long can I go without paying payroll taxes before the IRS comes after me?
Again, it comes down to choices. When you’ve got more to pay out than what you have in the bank what do you pay first? As I’ve mentioned before, I almost always have erred on the side of paying my employees because I see them as necessary to keep around for the survival of the company. I mean, I like them too…I don’t want them to think I don’t like having them around, but…you know, survival, yeah, that’s important too.
And so around the end of 2004 I started neglecting to make my payroll deposits. Just in case we’re not completely clear on what I mean, payroll taxes are the taxes an employer witholds from an employee’s paycheck. You know how you get paid $13/hr, but if you work ten hours you only get a check for $100 instead of $130? Or you get paid $50K per year but if you add up your checks you only got $35K last year? The federal government has decided it wants the employer to be responsible for collecting taxes rather than individuals themselves. Why? Because the government is more likely to get their money that way.
So for the sake of explaining, let’s say the going tax rate is 25%. If an employee gets paid $100, the employer witholds $25 of that. In addition, the employer has to match certain taxes, and so the employer pays another 7.5% or so that the employee generally doesn’t see. For businesses that deposit less than $50K in payroll taxes per year they only have to submit those taxes once per month. Business over $50K have to deposit payroll taxes after each payroll.
But what does an employer do when he has enough money to pay his employees, but not the taxes? In my case, I chose to pay my employees first. Then I figured I would catch up on the taxes later. The trouble is that by the time “later” came around it was time for another payroll, and I once again I only had enough money for payroll. Before I knew it I owed the government something like $30K in payroll taxes that I had meant to deposit, but by putting my employees first I hadn’t been able to.
The IRS moves slow, and so it was months before they contacted me to find out where “their” money was. I told them I had spent it all on iTunes. But seriously, I didn’t feel like I had a choice at the time other than to pay my employees and keep the company going. But the IRS presented me with evidence that has led me to change my opinions.
Here’s what you need to understand about the IRS:
1. When you fail to make your deposits the IRS wants to ensure you’ll never be late again so they charge you exhorbitant fines as well as a ton of interest. If you’re going to borrow money from somewhere just about anywhere is better than the IRS, including credit cards.
2. While the individual agents might be nice (ours was very professional, courteous, helpful, and nice), there is no mercy in the policies and the agents must enforce the policies. In other words, the IRS will get their money–no exceptions.
3. Although you can request that the fines and interest be waived, the chances of this happening are not good. I’ve been through the process and as you work through it your optimism will quickly fade. If you get anything substantial you’ll be very lucky. Of the $10-15K or so I paid in fines and interest I got $240 refunded.
What the IRS is willing to do is put you on a payment plan. That stops the fines. It doesn’t stop the interest. That keeps on going until you pay everything off. In my case it took me over a year to pay everything off at $2K per month with a balloon payment of $15K near the end.
Normally when you pay for something you at least got something. That is, if you rack up your credit cards buying big-screen TVs, DVDs, music, etc. at least when you’re paying off those cards you can say “Well, at least I have all my beautiful stuff.” In my case all these taxes were for employees who no longer worked for me, and when they had worked for me I wasn’t paying myself, and so what did I have to show for it? I hadn’t made any money personally, I didn’t have a bunch of nice furniture. What I had was a brand, the MWI brand. You can’t discount that, but it’s also rather ethereal and feels insubstantial when you’re trying to pay the IRS $40K and trying to justify the expense in your mind.
What did I learn? Pay the IRS. You’ve got to see the IRS as one with your employees. If you can’t pay the IRS, you can’t pay your employees. My practice now is to never pay my employees without having paid the taxes for the previous pay period. Sometimes it’s a hard choice to make, but I’ve made the other choice before and it’s harder in the long run.Liked it? Share it!
That was a great post. I know a guy who is facing jail time because of this very issue. That’s a tough lesson to learn.
I AM FACE WITH THE SAME PROBLEM BUT THE AMOUNT IS ABOUT 130K CAN I GO TO JAIL FOR THIS.
A payroll service such as Paychex will take care of all this for you. I was paying, for about 7 employees, about $25 per pay period, and then they did the accounting, paid the looters (governments), and put out checks to the employees. They also subsumed ALL the risk of tax mispayments, etc. All I had to do was make sure the money was in the account, and they always let me know how much that would be with a complete and detailed accounting. I know the cash is very often the hardest part. Nonetheless, there is NO reason at all to not avail yourself of such a service – even if you have only one employee.
You will only go to jail if you engage in criminal behavior and commit a crime. Don’t try and deceive anyone. Be honest and proactive and you’ll never even think such a silly thought again. Even if you have to declare bankruptcy, as long as your not felonius, you are only guilty of failure, which is a success in itself for having tried.
As you say, all you had to do “was make sure the money was in the account”, but that was my problem–I didn’t have money in my account, and so I couldn’t work with a service like Paychex. My problem wasn’t that I didn’t know how to pay payroll taxes, my problem was that I had to choose between paying my employees or paying payroll taxes. If I paid my payroll taxes I’d be six weeks late on payroll instead of four weeks late, and my employees would leave and then I’d be finished. But if I could keep my employees around maybe I could dig out of the hole, catch up on things including payroll taxes, and then everyone would be happy. At least that was my logic at the time. Using a service like Paychex wouldn’t have solved the problem of whether or not I had money in the bank to pay anything.
I’m an employee who’s employer hasn’t paid the payroll taxes. It’s now time for me to file for my tax return and guess what? I can’t. This is a terrible thing, especially if you’re working paycheck to paycheck and you’ve already made plans with what you’re going to do with your return. Please think about this before skipping out on payroll taxes.
It’s not as though employers don’t pay payroll taxes because they just don’t feel like it, or because they don’t take into consideration the problems it may cause for their employees. Ok, maybe some employers are just that sloppy/lazy/inconsiderate, but I have a hard time believing that kind of employer could start a business, let alone keep it running for more than three months.
I don’t have any data, but based on my understanding of human nature and my own experience, I would be willing to bet that most employers who don’t pay payroll taxes do it for one reason–they don’t have the money. And thinking about the problems their employees will face if the taxes aren’t paid doesn’t help the money to appear.
In retrospect, it’s obvious to me now that if you don’t have the money to pay payroll taxes then you don’t really have the money to pay your employees either, and the right choice in this situation is to either lay off employees or let them share the risk with you by offering to let them work for free until you can pay them back. Of course those aren’t great options either, but there’s no magic piggy bank that gives you money whenever you need it…unless you’re a large bank with ties to the Democrat party, I guess.
I think that it is a shame that any employer must match an employees
social security and medicare tax. Why should I pay money that our generation will
never see. Payroll is my biggest expense and my employees work commission.
Our Federal Government makes is real hard for a small business owner to stay afloat.
All business owners should stick together and make changes. I would like to know if I can
get a bail out?
I have just faced my payroll tax issue as of today. Gosh, I don’t know how I will even sleep tonight…I have faithfully paid my employees, and am good for the money but cash flow is terrible right now. My bank wants to work with me when I don’t need the money and not when I do. Yeah – being a small business owner is just not all that great today.
If you don’t want to pay or can’t pay the payroll taxes for your employees don’t screw them by allowing the problem to snowball! Either layoff some employees or pay everyone on a 1099 basis. I don’t see what the big deal is. Everyone wants the benefits government has to offer but no one wants to help contribute. Its been my experience that most small business owners are too busy paying off other personal expenses and neglect the importance of paying their employees payroll taxes. Most small business owners will charge things to the company that really have no business being charged to the company just so they don’t have to pay taxes on their “income”. Greed pure and simple. If you choose to ignore paying your taxes you get what you deserve. Most business owners hire good accountants to deal with situations like this and get off.
Great article. My boss just received a federal lien for failure to pay payroll taxes for 3 quarters. He owes about 30 grand so far. Never had a federal lien before. He owns a laundry business. I’m curious as to what the next step will be for the employees..would the IRS actually come in an seize a laundry business? Im not sure if he is on a payment plan, maybe he is. There are no jobs out there for me to just go out and leave.
I feel badly for him. He’s had this business for 40 years and it’s going downhill. I know we all know we have to pay the IRS first. Im wondering if he’ll ever catch up. This guy doesn’t take lavish vacations or live extravagantly. He’s in a bind.
I hope all it works out. Again, great article!
I don’t know anything about the IRS “seizing” businesses, but they could always drive him into bankruptcy and force him to sell all the assets. In my case, I couldn’t get a loan from a bank to pay off the IRS unless I had the cash to cover the loan (of course if I had the cash to cover the loan, why would I want a loan?!). So I got a loan from my dad, got a loan from the bank, paid back my dad, and then paid off the IRS with the money from the bank loan, which I’m still paying off, but the interest on the loan is substantially less than the interest and penalties the IRS charges.
I’m in a very similar situation. I couldn’t afford for the same reasons to pay my payroll taxes in 2008 and haven’t heard from the IRS yet about it. I’m cringing thinking about it. Here’s another thing I’ve done, tell me what you think I should do. I never filed the W-2’s for 2008 either, thereby hoping not to draw attention to my neglectfulness. Should I file them now? I am just now figuring my taxes for 2009 payroll periods and was going to go deposit them in the bank for the 3 quarters for this year. Should I try to keep this year current and worry about last year when it catches up to me? Or should I try to take care of last year before worrying about this year. It’s a terrible feeling, especially in today’s economy. I have actually hidden this all from my husband at this family run business and it’s a burden, terrible burden.
Hello Procrastinator number 1……I hope to hear an answer to your problem…..I have a similar problem…no filed 1099’s, same with the taxes for payment…..for 2008 plus our company went out of business in 2009. Not to mention, the person who should of got a 1099 is filing for unemployment….I have no idea where to begin since I probably will be evicted from my condo for nonpayment…
My gosh to think there are others out there with a similar situation is somehow a godsend. I hope we get answers soon. My troubles run a little deeper also but I didn’t get into that. I wish there was help available for this terrible problem. Procrastinatiors Anonymous??? Could we be a support to each other in some way?
If you don’t want to pay or can’t pay the payroll taxes for your employees don’t screw them by allowing the problem to snowball! Either layoff some employees or pay everyone on a 1099 basis.
BAD ADVICE!!!!! If you improperly classify an employee as a “contractor” the IRS can make you pay back taxes on them. DO NOT DO THIS!!!!
Here is a link:
My small repair company hired a person as a subcontractor, to work a currently large project he filled out part of the form, said he would give us his insurance policy information, etc later…..
Well after several months, he came clean and said he had stopped paying his company insurance before signing on with us. We told him we will no longer be needing his services as he lied to us. Now this guy is trying to get unemployment from us…..because we are on file as the last known employer. He has not filled out a w-2 obviously.
So I am wondering since he let his company go down the tubes, and got rid of the insurance…are we now stuck with him as an employee or can we fight it…..cause he lied to us about his subcontractor status.
I have similar problem. I own small landscaping business and this year we started doing commercial installations. Well, I have general contractors, which haven’t paid me since June. I have to pay 20K in payroll to my employees. I tried to get loan from the bank and denied, then borrowed money from my mother-in-law and paid most of the payroll. Yesterday I called LNI and asked what should I do if I absolutely have no money to cover the remaining of payroll or taxes, the answer was, that I need to pay or I’ll get huge fines. Our government is willing to kill my company, get their one time money (if anything is left). I won’t be able to finish projects and generate any income to back pay or provide any type of employment in the future. Small businesses are so unprotected.
My employer right now is not paying in our payroll taxes, yet she’s taking it out of our checks, where do I report that?
“SPRICE” You need to report it directly to the IRS. Go to http://www.IRS.GOV and report them! If they hold the money out of your check, and you can prove that they are NOT paying the payroll taxes, then that is THEFT! They are stealing from you…and stealing from the government. NOT TO MENTION the fact that if you worked there all year, and you are trying to file for your tax return…and they have paid no tax on you….well guess what…no RETURN for you either…because the employer has not even reported to the government that the paid you a dime!
SHAME SHAME SHAME on you lazy, inconsiderate employers for not paying taxes on your employees. I guess you would rather save your Home that is in Foreclosure, or order just ONE MORE food order. As* Holes!
RJ – It sure is easy to criticize the other guy when you’ve never been in his shoes, isn’t it? Why don’t you try starting a business with a few employees and then tell us if you see things the same way?
As a business owner I went four years without getting paid while I paid my employees’ salaries and health insurance premiums. I put all my personal savings into the business. I took out loans and guaranteed them personally, putting my house, cars, and everything else I owned up at collateral. I borrowed money from family and friends. I maxed out $60K in credit cards. I worked 80-90 hour weeks while my employees only worked 40. I ended up moving my family out of our house and living in a studio apartment over a garage in order to save money while some of my employees lived in spacious, six-bedroom houses in fancy neighborhoods. Is this what you call lazy and inconsiderate?
I didn’t pay my payroll taxes for nine months because it was a choice between giving my employees a paycheck, or paying the payroll taxes. There was no way to pay both. I was already not paying myself, had maxed out all my credit cards, had taken out all the loans I could get approved for, had borrowed all the money I could from family and friends, and had already put all my savings into the business. I figured if I paid the payroll taxes but not the paychecks, then my employees would be forced to leave to find other jobs and I’d be out of business. But if I paid the paychecks then we could stay in business and hopefully catch up on the payroll taxes, everyone could keep their jobs. What would you have done differently?
Howdy all, my boss has not paid any payroll taxes for at least 4 months. And I do understand if things get tough for all of you that own your own company. My boss on the other hand has purchased a condo at the beach and a yaht at the marina this last year including the rental at the dock. All while falling into a mountain of unpaid loans and debt. To all of you owners out there that really do give up your own to make right for everyone else I have hope for your integrity. For all of you people who barrow someone elses life to live it up. I have three words for you.. GET A JOB, you obviously shouldnt be running one. At least know when to holdem and know when to foldem. Oh, I did own my own company and never did I not pay my taxes even when I had to eventually shut it down.
Joshua, I’m with you. Easy for RJ to criticize. You had the right intentions “saving jobs” but now you’re in the pickle. I’ll pray for ya man. God is the only one i’ve known to beat the IRS. Unfortunately the small business man never go the bail outs – the banks did and the gov’t just keeps printing new money when the need it.
RJ, Stealing from the gov’t?? Give me a break!! The gov’t steals from hard working people everyday and you and your fellow countrymen every day and you scream REPORT THEM! Walk a mile in another’s man shoes – you shall reap what you sow.
Sprice, there is a form you can file to pay your own taxes – be glad you have a job or just quit if you don’t want to file your own taxes. Don’t hurt others that need to feed/shelter thier families.
I too am in trouble with my payroll taxes. It is truly a cash flow problem I will run at least 3 payrolls before I receive payment from a customer. And since I am not a big bank or GM, I cant get a bail out or even a SBA loan from the bank. I also have to pay sales tax on my invoices BEFORE I even collect the money. And some of my customers went out of business themselves and never paid me. But I still have to pay my employees because they worked! The country is going under because it is losing “the small business owner”, but no-one wants to help us. No-one!! I have found a group called SCORE and it is free help for business owners they are nation wide, I hope they can help me……
I know someone who was NOT an owner but an employee. An employee who was instructed to write checks to pay employees. This owner did not pay taxes…now this employee? Who was NOT the owner, NOT a shareholder, NOT a company accountant, is being held liable for 60K in IRS backdue taxes, fines and interest. OWNER died. Wife of owner not reachable. IRS doesn’t care and is holding this employee responsible. HOW is this legal???
The IRS must be paid, and they’ve got the guns to make sure it happens. Not sure they care all that much that the right people are paying up, just that someone pays up.
If I want to make payment arrangements with the IRS & FTB but need to have employee W9’s correct, is there a form to file so that I can allow employees to file their taxes but I don’t have to pay all of the taxes at once and can make arrangements