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As a business owner, hiring employees has a lot of positive implications for your growth opportunities. However, your tax obligations also become a lot more complicated with every paycheck you cut. Employment taxes are an inevitable part of income, but failure to pay them can lead to harsh penalties and criminal charges. Understanding your obligations as an employer is an essential part of running your business.
The Basics of Employment Taxes
Each time you pay an employee a certain amount must be held for payroll taxes. The IRS considers employment taxes as a “trust fund,” which must be held until they are paid to the government. Anyone who is involved in managing payroll or financial operations in the business is responsible for ensuring that employment taxes are held and dutifully paid on time and in-full. Even if you are an employee yourself, handling this aspect of any business makes employment taxes your responsibility, and you will be held accountable.
Legal Consequences
Failing to pay employment taxes can incur some of the most severe penalties on an individual basis. The Trust Fund Recovery Penalty (TFRP), also known as the 7202 FICA tax, can be imposed on anyone responsible for collecting, accounting, or paying employment taxes and willfully fails to do so. The amount of the TFRP is usually equal to the amount of unpaid employment taxes. This can also include any unpaid Social Security and Medicare taxes withheld from employee income.
The IRS is vigilant when it comes to collecting unpaid taxes from anyone, but takes especially aggressive action against any individual they consider to be responsible for the TFRP. Even entry-level employees responsible for cutting checks can be held personally accountable for any unpaid taxes, which makes the penalties especially unfair. In many cases, businesses that are struggling to pay debts or keep their doors open may dip into the trust fund, believing that they can pay them back in time for tax season. However, doing so, whether the money is paid or not is considered illegal and can lead to criminal charges.
In addition to the TFRP, the IRS may impose additional penalties with interest on unpaid taxes. This situation can quickly snowball out of control and grow to levels that seem impossible to pay. Failure to pay all of these fines is a criminal offense that can lead to more fines, imprisonment, or both. This can be an especially challenging situation for someone who believed the funds were being held, only to discover that they have been misappropriated at their expense.
How to Move Forward
Regardless of whether you own or work for the business, if you find yourself in a situation where you’re unable to pay employment taxes, you have to take action as soon as possible. First and foremost, you should contact an experienced tax attorney to explain your situation and gain the appropriate legal counsel. Otherwise, do as much as you can to complete the appropriate paperwork for the tax season, and pay as much of the taxes owed as you can. It may be possible to have an attorney work with the IRS to set up a payment plan, negotiate a settlement and avoid criminal charges.
Keeping appropriate records and staying on top of your financial responsibilities to your employees and to the IRS will help avoid unnecessary surprises. In the event that you find yourself in this position, the extensive records can potentially clear you of any wrongdoing. Tax penalties can financially cripple your business, but it doesn’t have to be the end of your story. For a free consultation, call our office at 305-374-5544, where an experienced tax law attorney will help you through this challenging situation.
Weisberg Kainen Mark, PL
