Postponing payroll taxes on the rise

Accountant Gary Garwitz, a partner with Springfield-based accounting firm BKD LLP, is seeing a disturbing increase of business clients who are postponing payroll tax payments as they look for ways to manage cash flow.

Garwitz and some of his industry colleagues caution that missing payroll tax payments - which employers must withhold from employee paychecks and remit to the government - is one of the worst options available.

"Since you voluntarily pay your payroll tax deposits, the bill collector isn't on your door tomorrow if you don't pay them," Garwitz said, noting that he tends to see the increase in postponing payroll tax payments especially among nonprofit organizations, which may be more affected by immediate cash-flow issues.

Internal Revenue Service figures show that the government assessed $7.2 billion in civil penalties for employment taxes in fiscal 2007, up from $6.4 billion the year before.

Garwitz said most companies that miss payroll tax payments don't do so maliciously or intentionally.

"You make payroll Thursday and you have to pay payroll taxes on Friday, and after paying payroll there's no money left, so you say, 'Well, we'll pay it next week or next month,'" Garwitz said. "It's a bad situation to get into."

Sandra Terrell, certified public accountant and firm administrator for Huckstep & Associates, said nonprofits in particular consider missing payments during a rough economy because they're being hit from two sides - donations are down, and demand for services is up. Garwitz and Terrell declined to cite specific client examples.

A costly mistake

Even if money is tight, however, accountants say skipping payroll tax payments is never a good idea.

Bob Helm, managing partner with Springfield accounting firm Elliott, Robinson & Co. LLP, said the main reason companies should promptly make such payments is because the costs can quickly spiral out of control.

"It's a terrible idea, because the penalties and interest attached to that are incredibly high," Helm said. "You never want to finance with the federal government, at any time."

Garwitz agreed, adding that the IRS does not look lightly on companies that fail to pay their required payroll taxes on time.

"Their attitude is that if a company is not paying their payroll taxes, those are trust fund taxes and you stole that. That was in the chain of money flowing to the government, and you stole that when you didn't pay it over," he said.

The government has various ways it can go about collecting the money, including levies on banking or savings accounts and liens on personal property.

Terrell said the IRS is also able to go beyond pursuing the companies and will go after the individuals who are responsible for not paying - and for not-for-profits, that includes any and all board members, a fact many board members may not realize.

"A lot of times with not-for-profit organizations, the board may not be as experienced in fiscal matters, or they may have signed up because of their civic duty but don't really grasp their full responsibilities to the organization," Terrell said.

Making it right

All three accountants said the best option for dealing with cash-flow issues is to look for ways to cut costs, such as reducing unneeded energy costs or vehicle usage.

Terrell said companies would even be better off borrowing money from another source to make payroll tax payments than postponing them. She noted that companies that don't have the money to send in for payments also often neglect to file related paperwork, only compounding the problem.

"If that happens, there are multiple types of penalties that can accrue - one for failure to file and another for failure to pay," Terrell said. "We always want people to send in their tax return and avoid that."

Terrell said it's better to make the IRS aware that the entity is having trouble paying payroll taxes than to ignore the problem. The government can set up an installment system to pay off tax debt, though Terrell said that option should be the last resort due to the high interest involved.[[In-content Ad]]