Timely reminder for small businesses

Timely reminder for small businesses to steer clear of trouble on payroll tax and retirement plan contributions IRS Employee Plan News (Fall 2008)

In these trying times, with cash scarce and credit hard to find, a small business might be tempted to “temporarily” use money it deducts for taxes and retirement plan contributions from employees’ wages. The Fall 2008 issue of IRS’s Employee Plans News [https://www.irs.gov/pub/irs-tege/fall08.pdf] suggests that practitioners remind clients that failing to remit payroll taxes and retirement plan contributions in a timely manner not only would violate an employer’s legal obligation, but also could subject them to heavy penalties.

Payroll taxes. IRS suggests that small business employers be reminded that when they deduct income and Social Security taxes from employees’ wages, the money is not theirs to use, even for a short period of time. Deducted amounts must be remitted, along with their portion of payroll taxes, by the next scheduled Federal Tax Deposit deadline. An employer that doesn’t deposit the money on time could be hit with:

  • penalties for making late deposits and for not depositing the proper amount; and
  • penalties for failing to file returns and pay taxes when due, for filing false returns, and for submitting bad checks.

The rate of these penalties increases with each passing day until deposits are made. Interest is also charged on the total unpaid tax and the penalty. These penalties and interest can add up quickly and lead to even bigger financial troubles for noncompliant businesses.

Observation: Perhaps the most compelling argument to make is that a company owner could be personally on the hook for unpaid payroll tax. Under Code Sec. 6672, when an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from any “responsible person,” i.e., a person who (1) is responsible for collecting, accounting for and paying over payroll taxes and (2) willfully fails to perform this responsibility.

Employee elective deferrals. Businesses that maintain a retirement plan and allow employees to make elective deferrals might be tempted to “borrow” money they deduct from employees’ pay for plan contributions to pay other business expenses. IRS stresses that employers have fiduciary obligations under the Employee Retirement Income Security Act of 1974 (ERISA) to deposit the deducted amounts as soon as those amounts can be segregated from their own general assets, but no later than the 15th business day of the month immediately after the month in which they withheld the contributions. Under a proposed Dept. of Labor rule, plans with fewer than 100 participants are treated as meeting this deposit rule if such contributions are transferred to the plan within 7 business days from the date those amounts would otherwise have been payable to the employee in cash.