The global pandemic hit a lot of businesses hard. Plenty of them struggled to stay alive and open. Some even closed their doors. There are many businesses that collected income tax, FICA, and medicare from their employees, but couldn't pay it to the government. Whether the business closed or not, there can be consequences to this.
Maybe you thought that you would catch up next quarter. You had hopes that the lockdowns would end and the economy would bounce back. Maybe you caught up. Many didn't catch up. For many businesses, both open and closed, more than one quarter went unpaid. Sooner or later this catches up to you and the IRS comes calling.
I am a tax attorney in Minneapolis, Minnesota. I represent taxpayers before the IRS and state tax authorities. I handle tax debt, audit defense, payroll tax issues, and criminal tax matters. There are substantial penalties for failing to deposit your employment taxes. This is because the government views the failure to pay these taxes as theft.
Your business collected this withholding from your employees for the government. It's the government's money and you are just holding it in trust until it is time to deposit it. If you can't pay at the end of the quarter, then you kept the government's money. When you don't make your deposit, the first thing that happens is you are assessed a Failure to Deposit Penalty.
At the same time, a notice is sent to you informing you of the missed deposit and demanding that you deposit the funds. This is important because of how the penalty is calculated. If you don't deposit within five days of the due date, the penalty is 2%.
If you don't deposit payroll taxes after five days, but before 15 days pass, the penalty is 5%. If you don't deposit after 15 days, the penalty is 10%. By this time, you should have received the billing notice. (Notice that the penalties begin before you even receive the notice.) If you don't deposit the money within 10 days of the notice, the penalty is 15%.
Most of the time, when you can't pay the tax, you don't file the quarterly return either. That comes with its own Failure to File Penalty. This is a 5% a month penalty upto 25% total. If you get the maximum penalty for these, then that's already 40%. That's without counting the interest.
These penalties are against the business. Owners, officers, managers, bookkeepers, and others can also be made personally responsible for the payroll tax. It could also be possible to receive a criminal referral for these taxes. Quickly, one missed quarter can grow to a large sum of money and even years in jail. If you aren't able to pay your payroll taxes, it is important that you get square with the government quickly.
Attorney at Law
12800 Whitewater Dr.
Minnetonka, MN 55343