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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • IRS Payroll Tax – Figure out a way to pay it or it will “pyramid”

    IRS Payroll Tax

    Access to capital is often difficult for a small business. Especially right now. Many small businesses faced with a pyramid - egypt-thumb-350x232-49259cash flow problem can’t pay the FICA or Payroll tax. The money just doesn’t exist. The problem often gets worse and eventually the IRS shows up and asks for it.

    Some businesses avoid the payroll tax on purpose. They don’t do it when times are tough; they do it as part of the business plan. They will do one of the following:

    Filing Fake Payroll Tax Returns

    The Employer pays the employee than files a return that doesn’t match the reality. Typically, the return understates the amount of wages paid to the employee.

    Cash Payroll

    Many businesses pay employees in cash. The employee loses future social security and Medicare “credit” as a result, but is often satisfied with the arrangement because they aren’t paying any tax at all.

    Sometimes businesses get into trouble innocently:

    Leasing Employment

    The employee works for business Y but his paycheck is signed by employment leasing company x. Perfectly legal but sometimes abused. These companies will sometimes collect the money from the underlying business, and neglect to forward the payroll tax to the IRS. They often have a volume business and the amounts of money not forward can be very large. The employment leasing company will “dissolve” and the business owners who are paying for the leasing services can become personally responsible for a portion of the unpaid tax.

    Every small business will “pyramid” the debt if they don’t figure out a way to get it under control.

    Pyramiding

    No, this isn’t a cheerleading move. This is IRS lingo for the business that withholds and doesn’t pay the tax for a number of quarters in a row. The IRS hates this. In fact, the IRS doesn’t have to negotiate a settlement or a payment plan with a taxpayer business until a certain number of quarters are caught up.

    The problem with Pyramiding is that some businesses use it in a failed attempt to avoid the tax. The business will build up the tax debt, dissolve and start under a new name with the thought that the payroll tax will simply stay with the old business.

    The problem is that IRS can in certain circumstances continue to collect the tax from the new business and if it can’t, it will assess against the owners of the business a penalty in the amount of the employee portion of the payroll tax that wasn’t paid.

    Conclusion

    If you are starting a business, you will have to accept the fact that if you have employees you will have to collect and forward payroll tax. It is part of the cost of doing business until the tax code is changed.

    Payroll tax problems can be some of the most difficult to deal with for owners of small businesses as the trust fund portion of the tax isn’t dischargeable in bankruptcy and the IRS is not as willing to negotiate this type of debt in an offer in compromise.

    If you are having problems with payroll tax withholding, find a way to nip it in the bud now. If you have payroll tax now that is insurmountable, get some help.