For many small businesses, taxes may be seen as just one of many expenses. When you allocate your revenue to various expenses, you likely prioritize those accounts payable on variable scales of importance. Your utility bills and important contracts may receive their payments regularly and on time, as you may have difficulty operating your business if your electricity, gas or water is shut off.
If your business is manufacturing, you will need to keep your essential suppliers happy and ensure their invoices are paid on time to prevent your factory from running out of the material it needs to produce your product. Similarly, if you operate a restaurant, you need regular shipments of food to have any product to sell.
When your accounts receivable don’t match your accounts payable, you may skip paying some bills and make those up later. One area you may be tempted to short could be your employment or payroll taxes. You may believe that because taxes are filed on a yearly basis, you have until next April to make up any shortfall.
Don’t make that mistake. Your obligation to properly withhold and submit your payroll taxes is a fiduciary one. The Internal Revenue Service views that money as being that of your employees. You hold it in trust for them and you have the obligation of a trustee to safeguard that money.
So borrowing from that pool to pay other expenses is not permitted. Severe penalties can be imposed, the IRS can seize assets of your business and can even intercept payments from your customers. In addition, they can go after you personally for the tax debt, even if your business is a corporation or limited liability company.
If the IRS determines you intentionally failed to properly file your payroll tax obligation, they could refer the matter to their Criminal Investigation unit and you could face federal criminal charges and prosecution by the Department of Justice.
You and your tax attorney should set up a robust procedure that ensures your payroll taxes are accurately filed on time when they are due. Because of the severe consequences of this tax delinquency, this is one area that should never be left to chance or manipulated.