Don’t Put Mom In a Payroll Tax Ditch!

The Scenario – You need to make payroll this week but don’t have the cash. So, you go to Mom for a loan. She wants to help, but has limits.  So, she writes you a check for the exact amount of the net payroll, and good record-keeper that she is,  writes in the memo, “Net payroll due June 19, 2020.”

NOT such a great idea!

IRC Section 3505 allows the IRS to collect unpaid payroll Trust Funds from third party lenders. This applies when lenders lend funds for payroll knowing that the employer could not or would not deposit the required federal payroll taxes.

Yes, taking a loan for the net amount of the payroll is reasonably good proof that the loan was only for payroll; it was unlikely that the corresponding payroll deposit would be made. The IRS uses this evidence to assess the unpaid taxes on Mom, who may no longer love you as much.

How do you avoid alienating Mom? Do what professional lenders do in such loan circumstances. First, they’d never make the loan for the exact amount of the net payroll. Second, the loan agreement would NOT specify that the money was to be spent on payroll. This is a reasonably easy way to avoiding putting Mom down a hole.

If you or someone you know has received a Notice of Intent to Levy or has some other federal or state tax problem, please feel free to call or text me at (352) 317-5692  or email me at jim@taxrepgainesville.com .

Smart Way to Pay Late Payroll Taxes

The Scenario – Your business has fallen behind on paying payroll taxes. You can borrow some money, but not enough to pay off the full past due amount. Now what?

The answer is that you want to minimize the impact of the IRS assessing a penalty on you personally for 100% of the unpaid Trust Funds. The way you do it is to make a voluntary payment with a check. On that check you want to write in the comments section “Trust Funds Only”.  Due to Revenue Procedure 2002-26, the IRS must comply with your request on how to apply the payment against your account.

Why is this good? Sooner or later the IRS is going to get around to collecting those payroll taxes. Their big tool in this process is to access a penalty on the “responsible parties” equal to 100% of the money withheld from employees’ paychecks for income, social security, and medicare taxes. If you make a payment for the business to cover part of the past due amount without any designations, the IRS will automatically apply it first to the unpaid employer taxes. This allows them to maximize the 100% penalty when it is assessed.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com .

Can’t Pay Your Payroll Taxes?

Despite shrinking revenue, many businesses owners are choosing to keep valuable employees during the coronavirus shutdown.  And with cash in short supply, it’s tempting to ‘defer payroll tax deposits to the IRS.

I assure you,  going broke owing the IRS for payroll taxes is the worst mistake a business owner can make.

It’s time for a new game plan! Companies that are unable to make their required payroll tax deposits —and are out of borrowing power —have these choices:

  1. Downsize the staff to a level you can afford. This may mean going back to the owner being the only employee. But drastically cutting your overhead will allow you to get by while exploring other avenues.
  2. Close altogether.
  3. Or, take the biggest risk of all – keep things as they are, and hope things get better.  This approach has led a lot of people to a decade of grief. They continue to pay payroll, but stop making their payroll deposits.

You might think that the payroll tax is a corporate liability and that you personally can walk away. Think again. The IRS can and will assess a penalty equal to the trust funds (taxes withheld from the employees) on anybody that they feel is responsible for not paying them. Every business owner with check-signing authority will most likely be considered a responsible person. Here is the disaster — you cannot get rid of this penalty by filing individual bankruptcy. The IRS is going to be after you for at least 10 years.

If your cash flow is not cutting it, options 1 and 2 are your best bet. Your life will probably recover in 2 to 5 years and you can mark it up to lessons learned. Failing at option 3 will greatly expand your suffering.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com .