Staying Current With Payroll Taxes is No Laughing Matter

By: Tanya Boczek
Date: 11/1/2007

"The wages of sin are death, but by the time taxes are taken out, it's just a sort of tired feeling." Paula Poundstone

It's happened to all of us at one time or another - that unexpected expense, that unavoidable outlay of cash. For a staffing firm, it can come as an increase in workers' compensation premiums, unforeseen office expenses, or a spike in recruiting costs. Before you know it, you're short on your 941 payroll tax deposit. You promise yourself you'll catch up the following quarter. Many do, but some simply can't. Far too many companies habitually fall behind in their tax payments and find themselves with a sizable debt to the IRS. Unfortunately, short-term fixes can have disastrous long-term consequences for the systemically late taxpayer.

"The major difference between death and taxes is that death doesn't change every time Congress meets." Will Rogers

The Taxpayer Bill of Rights was enacted into the Internal Revenue Service Code in 1998 as a result of endless complaints to Congress of abusive actions by IRS agents. Immediately afterwards, taxpayers (and lenders) enjoyed a "kinder and gentler" IRS. During that time, Federal Tax Lien filings became very scarce, reserved only for the most severe abusers. But in recent years, the IRS has become increasingly aggressive in pursuing delinquent taxpayers.

Employers are appointed agents of the government to withhold federal, state and local income taxes from wages. The IRS is particularly intolerant of late payments of the "trust fund" portion of 941 payroll taxes, and there are severe penalties if these taxes are not paid timely - including the much higher likelihood of a Federal Tax Lien filing.

Non-payment of 941 payroll taxes really makes no sense for a business owner - tax debts are not dischargeable in a bankruptcy, even if the business is incorporated. And, worse yet, the business owner can be held personally liable for unpaid payroll taxes. So why do so many businesses fall behind in their tax payments?

At the heart of the issue, there are really only three root causes for recurring late tax payments:

CAUSE #1 Revenues Are Too Low
The logic here is fairly simple - if you're not charging your customers enough money, you will not be able to cover your expenses (including taxes). Raising bill rates can have an immediate impact on profit margins and is often easy to do. Customers usually know when they are being undercharged and won't balk at a modest rate increase - so long as you are providing high-quality service and your new rates are still competitive and reasonable.

CAUSE #2 Expenses Are Too High
The flip-side of Cause #1. If your bill rates are maximized (but competitive, of course) and you still don't have enough profit left over to pay taxes, then your expenses are too high! Scaling down expenses can prove more challenging than raising bill rates. Salaries, rent and insurance are the largest expenses for staffing firms, and none of these are quickly reduced. So focus on paring down overhead expenses such as training, entertainment, travel and office expenses while you analyze whether employees are being paid too much and whether more cost effective office space can be found.

CAUSE #3 Mis-Management of the Business (a/k/a Ownership)
Taking Too Much Money Out of the Company) If your bill rates are maximized and your expenses are minimized, you should be enjoying nice profit margins! But if you still don't have enough money leftover to pay your payroll taxes, you are most likely mis-managing your business. Where are these profits going? As for owners' personal use of company profits, let conscience be your guide. It is unwise to kill the goose that lays the golden egg.

"You must pay taxes but there is no law that says you have to leave a tip" Advertising slogan

The consequences of getting behind on paying payroll taxes can be paralyzing. Time has weight, and with each subsequent delinquent quarter, interest and penalties grow as the taxing agencies' tolerance shrinks. And the penalties and interest assessed by the IRS make it nearly impossible to catch up.

In addition, once a Notice of Tax Lien is publicly filed, the damage extends to your relationship with your bank or funding source. Not even the most accommodating of financiers will jeopardize their security position when an IRS lien is imminent. Lenders are prohibited from providing financing until a Federal Tax Lien is either paid off or subordinated to the lender. The lender's cessation of funding compounds an already serious cash flow problem. For these reasons, it's a fool's game to avoid paying your taxes on time. They must be an ongoing top priority if you intend to grow your business.

Conclusion
Compliance with tax laws need not be a "necessary evil". If you can manage your income and expenses so that paying your taxes on time becomes a top priority, you may just find yourself laughing all the way to the bank.

Tanya Boczek is a business development officer for the nationwide firm Amerisource Staff Funding. She may be reached at (440) 365-2006 or by email at tboczek@amerisourcefunding.com.