Failing to remit payroll taxes is a big mistake! Sometimes a business owner will let the payment of payroll taxes slide in favor of paying other vendors OR perhaps will make a partial payment, thinking it will be ok — not a good idea —– always remit the full amount of your payroll taxes before paying other bills. Here are a couple of examples why.
If you have check writing authority and it can be shown that you were aware your company or client paid other expenses when payroll taxes were due, the IRS can come after you for the taxes, penalties and interest.
D and her husband were equal owners and sole corporate officers of a business. After they separated, they continued to run the business. The firm failed to pay most of its employment tax withholding. After she and her husband settled, the IRS assessed D for the unpaid amounts personally as a responsible person. D said her husband was a controlling person, wrote and signed most of the checks, handled the finances, and did not share financial information with her.
In a court case, Dintelman v. United States, 3:07-cv-00081; E.D. Ark., it was held in favor of the IRS because; D had check-writing authority and occasionally exercised it. She also occasionally signed contracts and other papers for the business. Also, at a meeting with her husband and a business consultant she contracted with, the husband admitted the business was behind on its employment taxes. The responsible person cannot escape personal liability by surrendering authority, failing to exercise it, or delegating it to others.
Once D was made aware of the delinquency on payroll taxes (in the meeting with her husband), letting the firm pay other expenses before the taxes was willful failure to pay the taxes. Once aware of the delinquency, she was required to exercise her power and authority to avoid the corporation’s failure to meet its payroll tax obligations.
Designating employment tax deposits – NEVER let the IRS decide!
Y was sole owner and officer of a firm. The business faltered, and he fell behind on the payroll taxes, making partial payments and sometimes full quarterly payments. The IRS assessed him personally for all unpaid taxes plus interest and penalties. Y claimed that the IRS overstated the amount due because it misapplied his payments, which, he said, were partly for trust-fund taxes (FICA and FITW) and partly for nontrust-fund liabilities (the interest and penalties). The IRS was allowed to apply all of his payments to nontrust-fund liabilities.
In a court case, Westerman v. U.S. No. 6:10-cv-06055; No. 10-6055; W.D. Ark., it was held in favor of the IRS because; for deposits of less than full payment of employment taxes, the IRS is entitled to apply the amounts in its own best interests, even if this increases the taxpayer’s liability. To avoid letting the IRS allot deposits, the taxpayer must clearly designate how a payment or deposit is to be applied. This taxpayer did not clearly make a designation, so the IRS was entitled to allocate the payments as it did.
Source: American Institute of Professional Bookkeepers, Bookkeeping Tips