.

SmartMoney Blogs

The Tax Blog
The latest news, insights and tips about taxes

More Tax Trouble for Small Firms

Lots of small companies are skipping their federal payroll taxes in this wobbly economy, and tax lawyers say the Internal Revenue Service has gotten more aggressive about penalizing executives, accountants or other individuals for the lapses.

Getty Images

Among the IRS’s tough tactics: freezing a company’s accounts receivable, seizing assets and garnishing wages of responsible employees. It can assess substantial penalties and apply tax liens.

Payroll tax debt can “bring a company to its knees,” says Caroline D. Ciraolo, a partner at Rosenberg Martin Greenberg LLP in Baltimore, Md. She sees cases more frequently now, citing the example of a tool company that suffered a fire and, struggling in the rocky economy, used money it should have spent on payroll tax as an emergency slush fund.

Other clients with payroll tax problems included a medical services company and a group of charter schools for at-risk children. Closely-held businesses like these may have revenue of several millions of dollars and may be owned by four or five people.

A government watchdog in July estimated that some $54 billion in employment taxes go underreported every year. The report by Treasury Inspector General for Tax Administration described a study the IRS has under way, in which it plans to audit payroll-tax compliance by some 6,600 randomly picked employers for recent years.

Chicago tax lawyer Robert E. McKenzie, a partner at Arnstein & Lehr LLP, describes the IRS’s tactics as “harsh.” In singling out people to penalize, it seems “more likely to shoot at the person on the sidelines” instead of those genuinely responsible for the arrears.

The tax code gives leeway to hold the company itself liable for employment tax errors, or to lay responsibility with a range of individuals or entities, from officers, owners, bookkeepers and treasurers to lenders that prevent companies from paying employment tax by seizing control of company accounts and dictating what debts can be paid.

Once the IRS adds its penalties, the debt can snowball. Companies can be fined for outright failure to pay or to report on the tax, and also for paying late — that is, if it misses by more than two-and-a-half days the deadline for depositing the funds with a bank or other authorized institution, which then forwards them to the IRS. Fines for late payment can go as high as 25% of the tax due. Sometimes employers hesitate to file a tax report when they have fallen behind on payments, and that just compounds their problems and triggers more penalties.

Typically, tax attorneys like Ciraolo and McKenzie get involved after a business has run into trouble. Often their help is sought by an individual whom the IRS has held personally liable.

Tom Nichols, a tax attorney in Milwaukee, Wis., advises new businesses on how to avoid trouble in the first place. The best plan: Meet the deadlines, he says. Short of that, pay taxes the IRS could make a personal liability for the person it targets.

The Federal Insurance Contribution Act (FICA) tax is equal to 15.3% of an employee’s gross wages up to the FICA wage base of about $110,000, and consists of Social Security (12.4%) and Medicare taxes (2.9%). Half of the FICA tax is paid through an employee contribution (7.65%) and the other half is paid by the employer (7.65%); the latter can’t trigger personal liability.

In hard times, businesses tend to look at payroll tax as their own money, and hang onto it or use it to pay “the squeakiest wheels first,” Nichols says. Often, this is a supplier or someone else key to keeping the business running.

In the end, the IRS, not employees, stands to lose. Even employers who do not pay payroll tax report it on Forms W2 issued to employees, which keeps workers right with the IRS.

Comments

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 175)

View all Comments »
    • If you are even now upon the fence: get your favorite earphones, intellect down in direction of a Suitable Buy and ask in direction of plug them into a Zune then an iPod and look at which just one seems better towards oneself, and which interface results in on your own smile a lot more. Then you’ll understand which is straight for on your own.

      http://www.businessmarketingproduct.org

    • The Zune concentrates upon getting a Portable Media Player. Not a world-wide-web browser. Not a game machine. Possibly within the foreseeable future it’s going to do even improved in these areas, nonetheless for by now it truly is a outstanding path in the direction of set up and pay attention toward your audio and films, and is devoid of peer within that respect. The iPod’s benefits are its world wide web going to and programs. If those good even further persuasive, perhaps it is your perfect conclusion.

      http://www.politicsupdate.org

    • Hands down, Apple’s app keep wins through a mile. It can be a large conclusion of all varieties of apps vs a really unsatisfied decision of a handful for Zune. Microsoft incorporates systems, primarily within the realm of online games, nonetheless I am not positive I’d need to have in direction of guess upon the potential if this element is crucial towards yourself. The iPod is a substantially much better final decision in just that case.

      http://www.romaniadatingtips.org

    • Apple at this time incorporates Rhapsody as an app, which is a ideal begin, but it is presently hampered by the lack of ability to store regionally upon your iPod, and includes a dismal 64kbps little bit cost. If this modifications, then it will rather negate this convenience for the Zune, however the Ten songs per month will however be a huge additionally inside Zune Pass’ desire.

      http://www.recreationtipsforyou.org

    • If you’re even now upon the fence: get your most loved earphones, brain down in the direction of a Suitable Purchase and talk to in direction of plug them into a Zune then an iPod and perspective which a single seems improved toward oneself, and which interface generates by yourself smile far more. Then you can expect to know which is straight for oneself.

      http://www.buynewrealestate.org

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

.