Is your company short on cash and wondering which bill to pay first? That bill should be your payroll taxes!
At one point or another, every business is going to be short on cash and will be faced with the challenge of figuring out which bill they should pay first. The first bill that you absolutely have to pay first is your is your payroll tax bill – otherwise it is going to cost you dearly in the long run!
Below is a real example, taken from the March edition of The General Ledger, a monthly newsletter from the American Institute of Professional Bookkeepers.
To deal with its financial problems T Corporation decided to pay several creditors, putting off for two quarters paying employment (payroll) taxes and filing related returns. T Corporation finally paid the taxes and over $30,000.00 in penalties and interest, then asked for a refund of the penalties, claiming that it had been “teetering on the brink of bankruptcy.”
The case then went to court and the IRS won.
An employer must pay federal employment taxes when it has the cash flow to make the payments. Spending the money for other purposes is considered to be “willful failure” to pay taxes.
If necessary, a taxpayer must make an effort to borrow the funds or delay payment of loans or obligations so it can pay the taxes. Failure to pay employment taxes may be excused when payment would cause “undue hardship,” defined as a substantial financial loss, such as losing business or contracts, facing actions against the company by creditors that would damage the business, or having to sell property at a sacrifice price to pay the taxes by the due date.
But T Corporation provided no proof of any hardship(s).
Moral of the story — pay your payroll taxes; if you can’t contact your tax advisor for help in working with the IRS to delay payment AND be prepared to show proof. Don’t just make the decision to not pay them or pay them late; it is too costly in the long run.