Owning a business is the ultimate dream for many people, but that dream comes with a number of serious responsibilities. As a business owner, you have to worry about all aspects of your business’s day-to-day operations, and it is easy to let something slip through the cracks. Unfortunately, where many business owners make a mistake is in the tax department. Specifically, payroll taxes is where trouble often starts. Being aware of the most common causes of payroll tax debt can help you avoid finding yourself in this situation.
What Are Payroll Taxes?
First, we should explain exactly what payroll taxes are. Having a basic understanding of this concept is necessary for all responsible business owners. Payroll taxes are a type of employment tax. Simply put, they are taxes imposed on employee wages and salaries to fund specific social insurance programs, including Social Security and Medicare. These taxes are generally split between employers and employees, with the employer being responsible for withholding the employee’s portion from their paychecks. Payroll tax debt occurs when a business fails to withhold, report, or pay these government-mandated taxes from employee wages.
Cash Flow Problems
Running a business comes with highs and lows. Most businesses will at some point experience a lean period, where they do not have a lot of revenue coming in. When this happens, it can be difficult to cover overhead costs and other expenses. This is where many business owners get in trouble.
As mentioned, employers are responsible for withholding payroll taxes from employees paychecks. This money is held in trust by the employer. During lean times, business owners sometimes choose to “borrow” from these funds to cover business expenses. Then, when it is time to actually pay the IRS, they come up short, resulting in a payroll tax debt. Don’t make the mistake of thinking that this debt will only affect the business. The IRS can actually hold business owners personally liable for payroll tax debt.
Poor Bookkeeping or Financial Management
Poor bookkeeping can cause all sorts of headaches for business owners. In relation to payroll taxes, it often creates inaccurate financial data, which leads to missed, delayed, or incorrect payments to the IRS. This is usually because inaccurate data often causes an incorrect calculation on how much to withhold from employees’ paychecks. This mistake can usually be avoided with diligent financial reviews.
Misunderstanding Payroll Tax Requirements
Ignorance is often at the heart of many tax issues, and payroll taxes are no different. Many business owners, especially newer ones, just aren’t aware of their payroll tax obligations. They may be unfamiliar with deposit schedules, confused over filing deadlines and forms, or not understand employer vs. employee tax responsibilities. Any of these can lead to a payroll tax debt.
Rapid Business Growth
Business growth is usually a good thing, but it can cause issues to pop up. As a business grows larger, payroll complexity increases. Additionally, it is very common for a growing business to hire new employees without updating payroll processes. Either of these can result in the inaccurate withholding of payroll taxes. It is important that as your business grows, you ensure that administrative systems scale at the same rate to avoid these issues.
Employee Misclassification
Generally, employers are not responsible for withholding or paying payroll taxes for independent contractors. These contractors are considered self-employed and responsible for their own taxes. In an attempt to save on taxes, some business owners will misclassify employees as independent contractors. If you are discovered to be engaging in this practice, you will still be responsible for the payroll taxes that should have been paid for that employee, as well as the penalties associated with misclassifying an employee. It should be noted that sometimes misclassification happens out of ignorance, so you should be sure that you understand the difference between an employee and independent contractor. The Fair Labor Standards Act outlines the difference between the two.
What To Do If Your Business Has Payroll Tax Debt
If your business has payroll tax debt, it is vital that you act quickly. Resolving the debt as soon as possible will help you to avoid additional penalties and interest. It can be extremely helpful to engage the services of a consultant that specializes in payroll tax debt relief. These experts know all of the ins and outs of payroll tax law and can negotiate with the IRS on your behalf.
