All of a sudden, cash has become really tight. The worst thing is that you didn’t even see it coming. The payment from your best client didn’t arrive this week. It’s the same client that has never once been a day late with their bill. And now
payroll is due. And so is the rent bill and utility bill. As a business owner,
you are now faced with an ugly choice: Do you risk not paying the rent and
having the landlord show up at your door? Do you “slow pay” the utilities and
risk the power going out? Or, do you use the IRS as the lender of last
As you run through the options in your head, it’s easy to justify this way of thinking. After all, you are sure that you’ll be able to make up any past due payroll taxes next pay period. Surely the customer’s payment will come in next week and as long as you can catch up with the taxes before your quarterly 941 report is due, it will only be a fine – a fine you might regard more as interest. This isn’t tax fraud or something that happened because you just purchased a private jet; this is just what sometimes happens in a small business. And anyway, you only turn in a 941 once a quarter and it will probably be another two months
before the IRS catches the shortfall. You don’t want to be late on the payroll
taxes, but given the alternatives, it seems like the one that will cause the
least immediate disruption, and give you the most time to fix the shortfall.
Right about now most business owners reading this are going to fall into one of two groups of thought. The first group will be shaking their heads in disbelief and thinking, Who in their right mind would ever consider borrowing from the IRS? Congratulations, because you are right. You should NEVER use the IRS
as the lender of last resort. In fairness though, it’s probably more than
likely that you’ve never had to face the quandary.
For the other group of business owners, the ones who very well may have had to face this decision before, or, can foresee the possibility of someday having to make this choice, the question is “Why not?” Here’s why:
It’s Not Your Money
As virtually all business owners know, payroll taxes consist of an employer
portion of FICA and Medicare that the company pays, the employee’s contribution of FICA and Medicare, and the employee’s Federal Income Tax. The employee’s portion of the taxes is referred to as the Trust Fund portion. When a company does not remit the employee’s portion of withholdings, they have not only shortchanged the government, they have used someone else’s money (without their permission) to run their company. Although they may not harbor a fraudulent intent, this action could be looked upon as fraud.
Here’s an easy way to remember why a company should NEVER “borrow” from the IRS by using the Trust Fund portion of payroll taxes: You can go to jail!
Clearly this is not a cash flow strategy that should be considered. Even if you just know that your customer’s payment is in the mail and will arrive soon, it is not worth the risk. The penalties, fees and interest are steep and can snowball out of control, quickly. Even with the best of intentions, the company and the party responsible for remitting the payroll taxes can soon find themselves in a hole that is hard to climb out of.
How Can I Avoid Being Put in This Position?
Through effective cash flow planning. At B2B CFO, we have a saying – “Every company, regardless of size needs a CFO.” Likewise every company should have a cash flow forecast or projection. A regular analysis of the direction your company’s cash flow is trending will give a business owner the capability to adjust before he or she is faced with a dangerous decision. Many B2B CFO clients have found that the use of a rolling 13-week cash flow forecast has allowed them to manage their working capital more effectively and avoid this singularly nasty symptom of being in “The Danger Zone.”
By the way, not only does every company regardless of size need a CFO, with B2B CFO now virtually every company can afford one!
What If My Company Already Owes Payroll Taxes?
To fix the issue, you first have to accept the seriousness of the situation and
resolve to correct it.
- Don’t fall any further behind. If you are not in a position to catch up the past due amounts, at least make sure that all future payments are made promptly and completely.
- Contact a tax professional for advice. Depending upon the size of the issue, this could be a former IRS agent now in private practice, an experienced CPA, or a tax attorney. I would strongly discourage you from talking to the IRS on your own. Get someone on your side who will guide you through the process. B2B CFO partners have many relationships with experts in this field and will be happy to recommend several in your area.
- If you don’t have a reliable cash flow forecast, prepare one immediately. You will need this information in order to determine your current situation and your ability to come up with an acceptable payment plan. If you need outside help preparing a forecast, or educating your staff about preparing one, don’t hesitate to bring in a professional. A B2B CFO partner can quickly and economically assess your situation and deliver and effective tool.
Past due payroll taxes are a serious issue, one that should scare you into taking action. But in most cases it can be resolved. Recognize that you will need some
professional help and face the issue now before it gets worse. Once accurate
cash flow projections become a part of your regular management practice, you’ll
find that your company will probably be more profitable, and your stress level
will be more manageable.
If you’d like to discuss any of these issues, please feel free to contact me or your
local B2B CFO partner.