More Small Businesses Are Facing the Challenges of Delinquent Payroll Tax Problems

Despite small businesses' importance to America, if the IRS thinks your small business owes delinquent payroll taxes, you are guilty until proven innocent. When it comes to payroll tax debt, the IRS has unyielding power and authority to collect. They have the power to padlock your front doors, putting you out of business, without obtaining a court order. There are lots of people in this economy starting new businesses. And there are a lot of small businesses with IRS problems who fall behind on their payroll taxes (using this money to keep the lights on instead of making payroll tax deposits).

According to the Small Business Administration, small businesses:

• Represent 99.7 percent of employer firms.

• Employ about half of all private sector employees.

• Pay nearly 45 percent of total U.S. private payroll.

• Have generated 60 to 80 percent of net new jobs annually over the last decade.

• Create more than half of nonfarm private gross domestic product (GDP).

• Hire 40 percent of high tech workers (such as scientists, engineers and computer workers).

• Are 52 percent home-based and two percent franchises.

• Made up 97.3 percent of all identified exporters and produced 28.9 percent of the known export value in FY 2006.

• Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

Just when you thought the small business tax problem was bad, here's even more horrific tax news. Uncle Sam is gunning for small businesses with delinquent payroll tax problems. Because small businesses are the largest contributors to the annual tax gap, the IRS is cracking down on them! Check out my recent article about how the New Economic Stimulus Plan Calls for Heightened IRS Enforcement. If you're a small business with delinquent payroll tax problems, today it is even more mission critical to fix those payroll tax problems fast.

Since payroll tax penalties can be the kiss of death to many small businesses, the best way to dodge delinquent payroll tax penalties is by avoiding payroll tax problems in the first place. When your business is starving, dipping into the payroll tax cookie jar may be too tempting to resist. Save your business from yourself.

Here are a few small business payroll tax tips to stop delinquent payroll tax problems before they appear:

  1. Plan ahead: Budget at least 10% of an employee's annual salary for payroll taxes (Check with your accounting professional to make sure that number is high enough for your locale).
  2. Use a service to handle the payroll so you won't be tempted to dip into the payroll tax fund. Use Electronic Federal Tax Payment System or EFTPS to automatically send payments. The computer won't "forget" to send your payroll taxes.
  3. Look at your head count. Perhaps you can use independent contractors instead of employees. Check out the IRS web site for Independent Contractor (Self-Employed) or Employee test to see if this payroll tax slashing tip works for your small business.
  4. File your tax return on time, even if you don't have the money to pay your tax bill.

If you can't afford to pay your taxes, you can still file your return on time and save 25% on the failure to file penalty right off the bat. What many people don't understand is that filing an extension just puts off the inevitable, because it's not an extension of time to pay, it's just an extension of time to file. So what we tell our clients is that no matter how much is owed, if they enclose a check for $5 or $10 with the return and file it on time, it will reduce their filing penalties. Additionally, it creates a computerized record of account at IRS showing that you sent in a payment with your income tax return (reflecting good faith and credibility on your part).

But say you're already in trouble with the IRS for delinquent payroll taxes, what do you do next? Don't panic. Just keep in mind that there's a solution to every payroll tax problem. Whether you owe $700 or $7 million in payroll tax debt, you can find a way out, sometimes for a small fraction of what you owe, sometimes without paying a dime. The key is contacting a tax resolution professional as soon as you can. A consultation with a good tax attorney or tax resolution specialist can turn your delinquent payroll tax nightmare into a distant memory so you can go back to the business of your small business, creating the American dream.


Michael Rozbruch, one of the nation's leading tax experts, is a Certified Tax Resolution Specialist (CTRS), licensed CPA in the state of Maryland and CEO & founder of Tax Resolution Services. He teams up with an expert staff of tax attorneys, CPAs, and tax relief professionals to help individuals and small businesses solve their IRS problems with tax liens, unfiled back taxes, offers in compromise, wage levies, tax relief, delinquent re...

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