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The IRS is NOT a Bank

The IRS is NOT a bank. Doesn’t seem like this statement needs to be made, does it? But an alarming number of small businesses are falling behind on their payroll taxes, and second to “Not Enough Sales,” it is the most dangerous problem a business can have. So, someone needs to write this article. Here it is.

Don’t fall behind on your payroll taxes. That’s rule number one and it should be absolutely inviolable. The IRS has very little patience or understanding for either ignorance or mistakes and none at all for fraud. This article is NOT meant to be tax advice, but rather to impress on business owners how important it is for you to get good tax advice. Here are some simple rules that should convince you of your need to go talk to your accountant.

Most people who do any work for you are employees. You hear about independent contractors and there are legitimate ones, but you will be better off assuming people are employees. Therefore, budget not only for a person’s salary and benefits, but for the employer’s portion of FICA, Medicare, FUTA, Worker’s comp and any state equivalents required in your state. Do not assume someone is a contractor. Go directly to your tax advisor and have him/her pull out and carefully apply all the tests that determine independent contractor status.
If you write yourself a check, assume it’s taxable. Most business owners understand that they must establish a reasonable salary for themselves if they work in the business. You must pay both the employer and employee portions of all taxes on wages paid to yourself and your family members. Yes, you can pay dividends from the company that are not liable for payroll taxes, but watch out! Go directly to your tax advisor and have him/her pre-approve the plans you have for paying yourself and your immediate family.
When you write a payroll check, write a tax check. This is the easiest way not to get behind. If you pay wages, you owe taxes. It’s as simple as that. If you don’t know how to figure the right amount…you guessed it, go directly to your tax advisor and have him/her create a template you can use to figure taxes on payroll. Then make a payroll deposit immediately. This can be done through your bank or directly with the Feds and state on-line.
If you aren’t disciplined or organized, don’t do your own payroll. There are easy, inexpensive payroll services that will take care of the details for you and keep you out of trouble. Hire one that will actually figure the taxes due and make the deposits for you. Go directly to your tax advisor and have him/her refer you to an appropriate service.
Do not, under any circumstances, use the IRS as a bank. Too many companies get into trouble when they think they can float their cash flow, “just until the 15th” by not depositing the taxes. Find some other way – any other way to fund your cash needs. The IRS is not a bank. The penalty and interest you will have to pay if you miss your payment will definitely be larger and more dangerous that whatever else you do to meet cash needs. Go directly to your tax advisor and have him/her create a cash flow projection for your business and then make plans using it as your guide.

This article is not anti-IRS. As a matter of fact, most agents will try to work things out with you if they can, but it will still cost you. Rather, this article is anti-tax evasion, for any reason, for any amount of time. Too many small and medium size business have been sunk by penalties, interest and levies. Tax problems will destroy your cash flow and your reputation with your customers and vendors. The best answer is simply, do it right, right from the beginning. Don’t fall behind on your payroll taxes

Thanks to Richard C. Schmitt Accounting (dghcpa@citilink.com 651-454-0141) for checking my facts.

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The IRS is NOT a Bank