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.


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 162)

View all Comments »
    • The refreshing Zune browser is surprisingly superior, still not as Great as the iPod’s. It will work properly, but is not as prompt as Safari, and contains a clunkier interface. If oneself from time to time program upon working with the world wide web browser which is not an issue, nevertheless if you happen to be designing towards browse the world-wide-web alot versus your PMP then the iPod’s much larger exhibit and much better browser may possibly be necessary.


    • I’ll machines this critique towards Two versions of folks: present Zune homeowners who are taking into consideration an upgrade, and human beings seeking towards choose between a Zune and an iPod. (There are other gamers great importance thinking about out there, together with the Sony Walkman X, nonetheless I assume this presents oneself ample info toward generate an informed alternative of the Zune vs gamers other than the iPod line as nicely.)


    • Apple currently is made up of Rhapsody as an application, which is a suitable get started, however it is presently hampered as a result of the incapacity in direction of retail outlet regionally on your iPod, and is made up of a dismal 64kbps little bit cost. If this improvements, then it will fairly negate this advantage for the Zune, yet the 10 audio for each thirty day period will nevertheless be a massive moreover in just Zune Pass’ choose.


    • This is getting a bit a lot more subjective, yet I a lot want the Zune Marketplace. The interface is colorful, has even further flair, and some interesting capabilities which includes ‘Mixview’ that allow for oneself quickly look at comparable albums, audio, or other consumers very similar to what you’re listening to. Clicking on just one of all those will heart upon that product, and a further set of “neighbors” will arrive into viewpoint, allowing by yourself in the direction of navigate in close proximity to researching by comparable artists, audio, or buyers. Chatting of people, the Zune “Social” is way too superior enjoyable, allowing by yourself find some others with shared choices and becoming pals with them. You then can pay attention in the direction of a playlist designed dependent on an amalgamation of what all your pals are listening towards, which is additionally exciting. Individuals fearful with privateness will be relieved toward recognize oneself can protect against the general public towards watching your unique listening behavior if by yourself therefore come to a decision.


    • This is turning into a little bit extra subjective, nevertheless I considerably prefer the Zune Market. The interface is colourful, is made up of further more flair, and some neat attributes like ‘Mixview’ that make it possible for oneself suddenly see comparable albums, audio, or other users identical towards what you are listening toward. Clicking upon one particular of those will centre upon that product or service, and a different fixed of “neighbors” will arrive into belief, enabling you in the direction of navigate close to investigating by related artists, tunes, or consumers. Speaking of users, the Zune “Social” is furthermore great enjoyment, making it possible for on your own come across others with shared tastes and turning into good friends with them. You then can hear in direction of a playlist intended based mostly upon an amalgamation of what all your friends are listening in the direction of, which is furthermore exciting. These concerned with privateness will be relieved to notice you can avert the community from looking at your unique listening patterns if your self thus select.


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.