Smalls businesses rely on their employees to bring revenue in the door. So, when cash flow problems strike, many small business owners choose to pay their employees and delay their payment of federal employment tax deposits. Even missing one deposit can lead to a snowball effect that is difficult to recover from. However, there are steps you can take to get back on track and keep your business running.
(1) Pay your current federal employment tax deposits
You may be tempted to pay off your oldest debt first and skip current payments until you’re caught up. This method can result in significant penalties that will add to your business’s tax liability and make it even more difficult to catch up. If you are on a monthly deposit schedule, then your deposit must be made by the 15th of the following month. If you are on a semiweekly deposit schedule, then your deposit must be made by the Wednesday of the following week. The IRS will assess a failure to deposit penalty if your deposits are not made by these dates. This penalty can range from 2% to 10% depending on how late the penalty is deposited.
To avoid this vicious cycle, it’s best to focus on paying current federal employment tax deposits first. Then any additional funds can go to pay off older debts. In many cases, this can minimize your penalties and get you on the path to qualifying for an installment agreement.
(2) File your current tax returns on time
It may seem appealing to put off filing a tax return if the return shows a balance that your business is unable to pay. However, delaying the filing will only increase your business’s exposure to penalties. The IRS will assess a failure to file penalty of 5% of the unpaid balance per month on all tax returns that are filed after the due date. The penalty can add up to as much as 25% of the unpaid balance. This penalty can be avoided by filing your tax return on time regardless of your business’s ability to pay.
(3) File any past due tax returns
If there are tax returns that your business has not filed, now is the time to do so. In order to get into an installment agreement with the IRS, your business must be “in compliance” which means that all required tax returns have been filed. This ensures that all tax balances have been assessed and can be considered when negotiating an installment agreement.
(4) Propose an installment agreement
If your business is not able to pay of its employment tax balance in full, there are several paths you can take to secure an installment agreement.
First, if your business owes less than $25,000 to the IRS, then you could qualify for an In-Business Trust Fund Express Installment Agreement. If you propose a monthly payment that will pay the balance off within 24 months, then you may not have to submit a financial statement to the IRS to support your proposal. Additionally, if the IRS accepts your proposal for this type of agreement, your business will be protected from IRS levy action and the IRS will likely not file a federal tax lien while you’re in the installment agreement.
Second, if your business owes greater than $25,000 to the IRS or you cannot pay your balance off within 24 months, you may propose an installment agreement based on your business’s ability to pay. The IRS will require you to submit a financial statement, Form 433-B, which states your business’s assets, income and expenses. From this form the IRS will determine whether you must liquidate assets to make a down payment and what your business can pay monthly. If the IRS accepts your proposal for an installment agreement of this type, your business will be protected from levy action while you’re in the installment agreement, but the IRS will likely file a federal tax lien.
There are many options for obtaining and IRS installment agreement for employment taxes. Each situation is different, so it is important to speak with an experienced tax attorney to discuss your specific situation and determine the best steps to take to get your business back on track.