Many business owners who employee help will be familiar with both the 1099 and W2 forms. A smaller business may be more likely to be using the 1099 than the W2. The difference between to two forms is as follows: with the W2, the employer is responsible for withholding the employees tax money – as in the case of a full-time employee.
The 1099 however is used for businesses who work with independent contractors, and it is the contractors responsibility to pay the IRS not the employers.
It is of course a more complicated matter to have employees and the require W2 tax withholdings and also adds a large degree of responsibility to the business owner to make sure they have both withheld the correct amount and made the payments to the IRS.
The employer also must be careful to follow the guidelines from the IRS on determining which classification their employee falls under. To help along those lines the IRS has posted resources for employers to determine the correct classification and their responsibilities and payment schedules. Those resources include: Publication 15, Employer’s Tax Guide and Publication 15-A, the Employer’s Supplemental Tax Guide.
Payroll taxes are only a concern for employees that are required to use the W2. The employer has several responsibilities including filing 941 tax returns quarterly and 940 tax returns yearly. Those quarterly and annual tax returns show the IRS the employer-paid taxes and the taxes withheld from the employee. These forms must be filed and the payments must be made to the IRS.
The IRS has made some changes, taking advantage of new payment technologies that remove any wiggle-room for employers to make the payroll tax payments. As of January 1, 2011 Employers are required to make their federal tax payments through the electronic federal tax payments system. This system is free but employers must register to get started. To make things more complex the employer must make separate payments for each different tax return type including tax forms 940, 941 and 945 and the payments must be made monthly or bi-weekly.
My Business Is Just Getting By. Why Should I Make The Payroll Tax Deposits And Not Use The Money Temporarily To Pay Bills?
Simple answer – the IRS will aggressively pursue collections against any business not in compliance with the payroll trust fund payments. In fact few tax problems will get the IRS going like payroll tax issues.
The Internal revenue services takes this very seriously and they have many draconian methods of collecting the money – none of them take into account keeping your business alive. The IRS can and will use the following means to collect back payroll taxes:
- Send an IRS officer to your business
- A bank levy on the business bank accounts to take the funds directly.
- The company officers in some cases can be held personally liable for the tax debt
- The IRS can even put a lock on your business and sell all of the assets at auction!
While it may be true that a business owner can reason out “I’ll use the payroll tax just this once to pay some bills and catch up later…” the IRS views this as stealing.
Not just stealing from the internal revenue service but also from your employees. In effect the business owner is simply spending their employees tax money. The employer is in a formal agreement to pay the employee’s taxes. This is where the term “Trust” comes in. If the money or even a portion of it is not paid to the IRS they will catch on fast. One way to remove the temptation of using or even making an honest mistake is to hire a payroll service. The payroll service will manage the businesses payroll and lift the burden and potential tax problems off of the business owner.
For the above reasons any business owner should always find another solution to financial troubles than using the payroll trust fund money.
If the IRS catches on and levies your bank accounts you will have created bigger problems for your business – possibly bouncing paychecks, vendor payments etc… So by solving one problem you create a far worse one.
If the business is simply financially unable to get back into compliance for the payroll trust fund they should immediately hire a qualified payroll tax attorney.
Trust Fund Recovery Penalty – What Is It Exactly?
Essentially the trust fund recovery penalty can used to collect from employees or officers that the IRS has determined knew of the tax liabilities, were in charge of financial decisions or in charge of making federal tax deposits. Yes you read that right. Officers of the company can be held personally liable for the unpaid taxes – an if so, the IRS will assess the Trust Fund Recovery Penalty onto the employee and pursue aggressive collection efforts against them until all of the money has been collected.
An officer or owner of a business may personally become liable for the Trust Fund portion of Business Payroll Taxes.
If you have or suspect you will be assessed a trust fund recovery penalty contact a qualified payroll trust fund lawyer immediately. An experienced tax attorney will know the avenues available to negotiate with the IRS to settle the debt in more agreeable way.
