What Happens If My Business Can’t Pay Employee Taxes?

This is a typical scenario: A business begins to have cash-flow problems. What’s coming in is not enough to pay the bills that are immediately coming due. The temptation is great. Money’s there, in the account, set aside for the IRS or state to pay employee taxes. The business owner thinks to himself:  "Maybe I can just dip into it for a little to pay the rent, some employees, some important vendors. It’s just for a little while. I’ll pay it back. They’ll understand."

NO, IRS and the state tax agency will not understand. In fact, for IRS employment taxes are one of its highest, if not the highest, enforcement priority. The reason is that in this country, the government does not have a tax collector. Tax collection is done by the many employers throughout the nation on whom is imposed the legal obligation to collect and remit to the government withholding for income taxes, and Social Security and Medicare taxes, also known by tax professionals as “941” taxes from the tax form used to report to the IRS.

Because the tax system is so dependent on businesses carrying out this task, it’s heavily enforced and the penalties severe. The business owner, or person who controls tax payments by the business, can be held personally liable for the business’ failure to remit the funds.

Once the business owner, principal or key employee is tagged with this penalty, it is very hard to shake. For example, generally the penalty is not dischargeable in bankruptcy. There are strategies that can be employed to minimize the damage, and sometimes eliminate it altogether, but it calls for some sophisticated lawyering.

Generally it’s not a good idea to use tax funds as working capital, but if you’ve done it and got caught, call and get help immediately. We will examine the options to address the problem.