If you are an employer, you are required to deposit your employment taxes on a regular schedule that’s dependent on the usual amount of the deposit. Most small businesses are on a monthly deposit basis, which requires employment taxes to be deposited by the 15th day of the following month. But what happens if you fall behind because you lack the funds to make the deposit?
Here are some ideas to help when you fall behind in tax deposits.
Pay it off
When cash flow becomes a problem, it may seem easy to duck employment tax deposits. You think it’s just this one time, but things can easily get out of hand. Make depositing employment taxes your number one priority—before paying the rent, utilities, and vendors. Seems easy to say, but hard to do when you have X dollars and your supplier won’t make a delivery without payment. Still, putting employment taxes on the top of your list of expenses is the best business practice.
If you haven’t made deposits, or only partial deposits, catch up before the IRS catches up with you. Find a way to pay off your debt. You may have to tap into a line of credit or even use cash advances on your credit card. The cost of this borrowing is less than the penalties and interest you’ll incur for not making employment tax deposits. The penalty is figured on the number of days the deposit is late, starting with the due date. The IRS has a chart of the interest, penalties, and hassles. If it’s one to 5 days late, the penalty is 2% of the unpaid deposit. This increases to 5% for 6-15 days, and 10% for more than 15 days. If you haven’t paid up by then and the IRS sends a notice for immediate payment, the penalty is 15% of the unpaid deposit. Then there’s interest charged on the penalties. The penalties and interest stop only when full payment is made.
Set up a payment plan
If you can’t immediately pay off what you owe, you may be able to pay it over time by getting an In-Business Trust Fund Express Installment Agreement (IBTF-Express IA). To qualify, you must meet all of the following conditions:
- You owe $25,000 or less at the time the agreement is established. If you owe more than $25,000, you can pay down the liability before entering into the agreement in order to qualify.
- You must pay the debt in full paid within 24-months or prior to the Collection Statute Expiration Date (CSED), whichever is earlier.
- You must enroll in a Direct Debit installment agreement (DDIA) if the amount you owe is between $10,000 and $25,000. There’s a small setup free.
- You must be compliant with all filing and payment requirements.
You may apply for an IBTF-Express IA online if you owe $25,000 or less in payroll taxes. You can also apply through the IRS Business and Specialty Tax assistance at 800-829-4933. If you don’t qualify for an IBTF-Express IA, you must prepare Form 433-B, CIS for Business, and call the toll free number above.
Whatever you do, don’t ignore the deposit requirement. If you do, you may be 100% personally liable for the trust fund penalty. This is the amount of taxes withheld from employees’ paychecks (trust fund taxes because an employer holds them in trust for employees). See a prior blog on this penalty.