An architect — a sharp, capable man — had gone into business for himself and hired a friend of his to manage his administrative responsibilities. Though she was not an experienced accountant, the architect had no doubt she was capable of handling payroll for his new company.
When his business won a number of large contracts, his company grew by 26 employees to manage the increased work. Soon, though, he had to let go of one. The architect’s trusted HR woman, he discovered, had failed to properly file payroll taxes. He found letters from the IRS and state government agencies informing him that the business had incurred more than $100,000 in penalties and back taxes. Her inexperience and negligence threatened not just the growth of the company, but its very existence.
Smart Business spoke with Jim McElwain, regional sales manager at Paychex, about the challenges of tax compliance for smaller businesses.
What challenges do smaller businesses encounter when it comes to taxes?
Every year, tax compliance gets more complex. The hardest aspects to keep up with are the changes in regulations, due dates and filing requirements.
Governments — city, state and federal — are passing new legislation every day with seemingly little regard to the administrative impact it will have on those operating smaller businesses.
Business owners are also facing government agencies in need of revenue that are less patient with delinquents than they once were. There was a time when business owners could work with government agencies to make good on filing mistakes or missed deadlines. Those with an otherwise good history often had a chance to get penalties waived. Agencies now are less likely to offer business owners a break.
Failing to withhold employee taxes seems to be a common issue for smaller businesses. Why?
Payroll is complex. There are many government agencies with compliance regulations that must be met, all with different requirements and due dates that make staying compliant difficult for the inexperienced.
Smaller businesses in particular often don’t realize some of the money they’re holding in their accounts is essentially encumbered — they’re holding it in trust to pay off their tax obligations. When a business needs to pay rent, however, it’s common that those future tax obligations become less important and the money reserved for those payments is used to address the more pressing responsibility. Then, when the first quarter sneaks up and the business owes thousands in taxes, there’s trouble.
What can happen to employers that fail to stay compliant with their tax obligations?
It’s common for businesses to end up with a tax lien, or worse, have its property confiscated for a sheriff sale because of failure to keep up with these obligations on a weekly basis.
While it’s tough to untangle tax problems and get back to business, those who owe the IRS money can’t afford not to pay the agency. The IRS and the state can come after a delinquent business owner personally, even if the company is an LLC and put liens on the owner’s personal property until the agency gets its money.
Many business owners know they’re not managing their tax responsibilities correctly but put off confronting the problem for another time. That will only make the situation worse. Even if a business is facing delinquent tax payments and potential penalties, some agencies will work to solve the problem — by setting up a payment plan, the agency gets its money while the business gets reprieve from making a large, single payment. But there’s little that can be done if the problem isn’t confronted.
How can smaller businesses keep up with their tax obligations?
Businesses, without exception, need an accountant or an outsource partner capable of bearing the responsibilities of payroll tax compliance. Though its common for business owners to bootstrap different functions, accounting shouldn’t be one of them. The business likely wasn’t established on the owner’s expertise in payroll and taxes, so let the professionals handle it.
Insights Payroll is brought to you by Paychex