Any taxpayer operating a small or medium business should know how the IRS treats back taxes and how much the IRS can take from business assets.
In this article:
- What Are IRS Back Taxes?
- How Does a Taxpayer Incur Back Taxes?
- How Do Payroll Taxes Affect Businesses?
- How Much Should a Business Withhold for Payroll Taxes?
- Can a Taxpayer Get Payroll Tax Debt Relief?
- What Are the Safeguards Provided by the Law to Prevent Businesses from Totally Closing Down?
Businesses and Back Taxes: What Taxpayers Need to Know to Safeguard Assets
What Are IRS Back Taxes?
The IRS can close down any businesses due to tax debt, however, the government rarely uses this option.
Back taxes are taxes that taxpayers have either 1), paid partially; or 2), left unpaid and are now considered late according to the tax filing and payment schedule. Whether the taxpayer intentionally or unintentionally left the taxes unpaid does not matter; the IRS applies appropriate fees like the failure to file penalty and interest on the tax debt.
Back taxes are like a financial avalanche: They grow in size the longer the inaction of the taxpayer.
This situation applies to both individual taxpayers and business owners.
Interestingly, most independent contractors and business owners who have to pay the IRS use the estimated tax system. Unlike most employed taxpayers who pay and file taxes once a year, corporations, businesses, and freelancers pay taxes quarterly.
Estimated taxes can be more complex than the straightforward annual filing. This complexity, especially in how taxpayers calculate the estimates for tax payments, can lead to unintended errors — which further leads to back taxes when tax returns are underpaid.
How Does a Taxpayer Incur Back Taxes?
The taxpayer may have:
- Incorrectly filed the amount;
- Mistakenly assumed that they are exempt from filing taxes;
- Forgotten to file and pay taxes;
- Filed the taxes late and did not pay the fees;
- Overdrafted their bank account, which can attach a bounced check penalty;
- Incurred any kind of penalty or fees that were left alone to grow; or
- Applied for an extension, got rejected by the IRS, but the taxpayer does not have knowledge nor receipt. All IRS documentations are considered mailed successfully if sent to the mailing address, even if the taxpayer has not read it.
Businesses and employers also have other special tax responsibilities, like withholding taxes for employees, payroll taxes, submitting tax documents like a W-2 or 1099-Misc, and paying for FICA (Social Security and Medicare contributions) for both employee and employer parts.
Non-compliance of these tax duties allows the IRS to levy special penalties, as well as to conduct tax audits. These penalties and audits can lead to undiscovered or newly-incurred back taxes.
How Do Payroll Taxes Affect Businesses?
Payroll taxes, specifically FICA or social security contributions and Medicare payments, can lead to substantial sums. For example, the employer must withhold 15.3% of the employee’s salary, with half of the full contribution funded by the employer.
Withholding 15.3% can take up extra capital needed for a business to improve their operations as well as expand. Payroll taxes can actually affect businesses greatly, as non-payment can lead not just to penalties, but also to possible cases of tax evasion, tax fraud, and tax avoidance, as the IRS has the duty to investigate any possible fraud regarding benefits that employees should get.
These payroll taxes can change yearly due to legal changes, as well as higher salaries. Also, non-payment can lead to suspicion from the IRS, which can also lead to even more penalties from an IRS tax audit.
Reading about how to calculate payroll taxes can help both business owners and employees as well. Of course, the percentages change, but for the tax year 2019, the percentages total to 15.3%, with Social Security reaching 6.2% for the employer contribution and 1.45% for Medicare payments for employer contributions.
How Much Should a Business Withhold for Payroll Taxes?
Adding 6.2% and 1.45% leads to 7.45% for a contributor. The employer must withhold 15.3% as he pays the 7.45% penalty from his or her pocket and then takes the 7.45% from the employee’s salary.
Lastly, payroll taxes that are not paid on time can lead to penalties. Specifically:
- If the taxpayer does not pay the payroll taxes 1 to 5 days from the deadline, the IRS levies a 2% penalty.
- If the taxpayer does not forward the contributions within 6 to 15 days, a penalty of 5% applies.
- Lastly, a penalty of 10% applies if the taxpayer pays payroll taxes after 16 days or more.
The Failure to File Penalty also applies, as well as the failure to pay, which adds another 5% (the law caps the two failure to file and pay penalties together at 5%) each month. Any small business which does not properly file may see back taxes grow each month, and may eventually be forced to close down.
Can a Taxpayer Get Payroll Tax Debt Relief?
Since a big chunk of possible back taxes for businesses can come from payroll taxes, applying for debt relief can help businesses stay afloat. The IRS needs to collect tax revenue and has the ability to forgive tax penalties from payroll taxes if the tax can be collected, as long as the tax debt is reasonable.
Taxpayers have the option to apply for penalty abatement, especially if this is the first instance of payroll taxes paid late.
Another option available for small business is to apply for an installment plan. Back taxes may still remain, however, the IRS can postpone any penalties and fees to give the business breathing room to pay their financial duties.
An Offer in Compromise (OIC) can lower the total amounts payable by a considerable margin. Of course, the business or taxpayer must prove financial hardship, or at least a high possibility of financial hardship, to have a shot at the IRS approval.
Generally speaking, the IRS can only take assets that the taxpayer or business owns. Ownership, or rather the lack of it, can actually protect the assets.
If the business owns the land it occupies, the IRS can levy the property for taxes. However, if the business only rents the property and the equipment, then the IRS cannot take the assets and equipment as the delinquent taxpayer does not own it.
A clarification: Even if the land has a mortgage, the IRS can also add a tax lien as the taxpayer owns the property. However, a lease contract over machinery can protect assets from an IRS levy, which can lead to taxpayers opting to rent business tools to minimize the risk of the IRS taking assets.
What Are the Safeguards Provided by the Law to Prevent Businesses from Totally Closing Down?
Under the Internal Revenue Code Section 6334, taxpayers receive protection for important business assets. The IRS must leave business tools worth at least $4,560 for the taxpayer, which can provide the business a chance to recover financially.
Another good protection afforded to taxpayers by the law lies with Internal Revenue Code Section 6331(j). The section can possibly save businesses from closing down, as the law behooves the IRS to consider other options and only apply the tax levy as a last resort.
The IRS, like taxpayers, works hard to collect taxes justly and wants to cooperate with businesses to reach their target tax collections. If businesses can show good faith and make reasonable tax payments, the IRS prefers to collect back taxes rather than close down businesses even if the IRS has the power to do so.
What are your tips to be able to file taxes on time? Have you experienced the back taxes process? How about ways to prevent getting back taxes? Share your insights below!
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.