My business owes back payroll taxes, what can I do? Before you panic, know that you are not alone in facing this challenge, many businesses get behind on payroll taxes every year. Whether you’re a new business owner and didn’t know you had to pay them or simply couldn’t afford to make your payments, unpaid payroll taxes are a big deal. Unfortunately, what starts out as missing a single payment can snowball into a much larger financial problem. If your business owes payroll taxes, you could be facing serious penalties from the IRS that can put your company’s livelihood at risk. However, that doesn’t mean you can’t redeem your business’s standing. In this post, we’ll walk you through how to pay back payroll taxes so you can settle payroll tax debt and move forward without this burden hanging over your business’s success.
Your Options for Paying Back Payroll TaxesAs with any business decision, you do have options for how to pay back payroll taxes. Keep in mind that how you choose to proceed can have a lasting impact on your business. You have several options for paying back unpaid payroll taxes:
- Ignore the problem. For some, the out of sight out of mind approach is the most comfortable. However, just because you’re ignoring the issues doesn’t mean the IRS will—at least not in the long term.
- File an extension. You may be able to file an extension on your payroll taxes for an additional month or up to 60 days, depending on your circumstances.
- Wait until your business has the cash-flow available to make the back payments. If you’ve just started to get behind on your payroll taxes, it might be tempting to hold off on paying them until your business has the extra money to do so. However, during this time, late fees and interest will accumulate.
- Reach out to the IRS. Taking the initiative is usually a good thing, which might drive you to face the facts and reach out to the IRS to get the payment process started. While taking ownership of your debt is a step in the right direction, approaching the IRS on your own can lead to unfavorable terms.
- Work with a tax firm to resolve your debt. Having an experienced tax firm work with the IRS on your behalf can help protect your interests and ensure that you have the best options moving forward. However, be careful when choosing who to work with—particularly when it comes to those who tout themselves as tax resolution firms.
- Installment Agreement: An installment agreement is a contract with the IRS that you will make payments on the taxes you owe within an agreed-upon time frame. The benefits of an installment agreement are that your back taxes stop accruing additional interest and penalties, you avoid offset of your future refunds, and should no longer have issues obtaining loans due to tax debt.
- Offer in Compromise: With an offer in compromise, you can reach an agreement with the IRS to repay a portion of your unpaid payroll taxes, based on the amount agreed upon through negotiation, if you are unable to pay the full amount you owe.
- Currently Not Collectible Status: By having your unpaid payroll taxes classified as “Currently Not Collectible”, you can pause IRS collections. This solution is designed to provide temporary relief during financial hardship.
The Penalties for Doing NothingWhile you can decide to do nothing at all and allow your debt to keep building, that isn’t typically recommended. In fact, not making your payroll tax payments is illegal. Penalties for neglecting to pay your business’s payroll taxes can include:
- Late fees: The IRS will apply a late fee for missed or late payments. The fees assessed may increase based on how late payment is.
- Accrued interest: Interest is charged on top of late fees for missed or late payments. The IRS may charge 5% to 25% for late filing and .05% per month you fail to pay
- Tax lien against your business’s assets: The IRS can put a tax lien against your business assets, meaning that they have a legal claim to your property.
- Seizure of your business: The IRS can enact a seizure of your business, providing them the power to close your business and obtain ownership of all of your assets.
- Criminal charges: If you fail to pay and disregard all of the penalties imposed upon you by the IRS, you are breaking the law and could end up facing criminal charges. Criminal charges may result in fines of up to $500,000 or five years in prison
How to Reduce Your PenaltiesYou may be able to reduce your penalties on unpaid payroll taxes with a:
- First-time penalty abatement: If this is the first time you have failed to pay your taxes on time, you may be able to qualify for a first-time penalty abatement. If the IRS grants administrative relief for the penalty you’ve accrued. However, there are stipulations based on your tax history.
- Reasonable cause: If you can prove that you had a sound reason for not filing and paying your payroll taxes on time due to a reasonable cause, the IRS may provide penalty relief. Instances that qualify as reasonable cause may include fire, natural disaster, death or serious illness, pandemic, or an inability to obtain records.
- Statutory exception: If you received incorrect written advice from the IRS, you might qualify for statutory exception. You will need to provide proof in order to be considered for penalty relief.
What to Do: Next StepsNow that you know your options and the potential penalties you face for getting behind on your payroll taxes, let’s dive into the steps you need to take toward tax resolution.
#1: Learn Your RightsWhile you are legally responsible for complying with payroll taxes, there is some leeway that you may be able to take advantage of to help you settle your payroll taxes while minimizing your consequences. When it comes to paying tax debt, you have the right to know about all of your options before making a decision. In addition to pursuing one of these repayment options, you also have the right to representation when trying to reach a settlement for how to pay back payroll taxes.
#2: File Your Tax ReturnsFirst things first, you need to file any outstanding tax returns, including the relevant employment tax forms for your business. You cannot move forward with the process to resolve unpaid payroll taxes until you are current on your tax filings.
#3: File Form 433-BIn order to negotiate payment with the IRS, you must complete and submit Form 433-B. Form 433-B, also known as the Collection Information Statement for Businesses, allows the IRS to collect relevant information about your business—like your income, debts, number of employees, and more—which will then be used to help guide their decision. It’s important that you complete Form 433-B honestly; concealing information or manipulating the financial state of your business could put you in even greater trouble with the IRS.
#4: Gather Your DocumentsAs with any form filed with the IRS, you’ll need to provide supporting documentation to verify the information on Form 433-B. You may need to provide a variety of documents that detail your business’s financial situation, including:
- Bank statements
- Profit and loss statement
- Payroll summary
- Monthly expenses
Dealing with the IRSWhile owing taxes can be frustrating, it’s important to keep in mind that the IRS is often willing to work with businesses to correct course and resolve tax debt. After all, they want you to pay your taxes, even if that means they may not be able to collect the full amount in some cases. This is why they’ve established repayment options. When it comes to dealing with the IRS, it requires tactfulness. For many business owners, this portion of the process can be intimidating or even completely out of their depth. That’s why it’s typically recommended that you work with a tax expert to resolve back payroll tax debt.
Get Professional HelpIn order to achieve the best repayment terms, it’s highly recommended that you work with a tax professional. A tax professional can make a request for resolution on your behalf, negotiate the best terms, and make sure that you take the right steps to settle payroll tax debt. That’s where Community Tax comes in; our tax experts have helped many small businesses behind on payroll taxes like yours find payroll tax debt relief. Our tax professionals have a deep understanding of IRS policies, tax laws, and the best negotiation strategies—all of which will make figuring out how to pay unpaid payroll taxes much easier. Plus, you have a lot to lose. Don’t take an unnecessary risk by pursuing a resolution on your own, let us help.
Request an Installment AgreementAn IRS installment agreement allows you to make payments over time, easing the burden on your business. You must provide a proposal for your installment agreement to the IRS, or better yet, your tax representative will. The proposed installment agreement will need to include:
- The amount of the monthly payment (calculated based on how much you owe and your available income)
- When you will begin making payments
- Which debt the installment agreement covers
- First payment
Provide Your DocumentationThe IRS may request additional documentation to support your installment agreement request. It is in your best interest to provide this information as quickly as possible to ensure that the process proceeds smoothly.
Resolving Back Payroll Taxes: Other Helpful TipsBeing behind on payroll taxes can be a stressful situation for your business, but hopefully with the above guidance, you will have a clearer view of how you should approach your payroll tax debt and what to expect throughout the process. In addition to understanding the above key aspects, we have other tips you should keep in mind when settling payroll tax debt:
Double-Check Before SubmittingBefore you submit your request for a payment plan, it’s essential that you take the time to double-check all of the information you’ve provided—from figures regarding your business income to the calculation for your monthly payment. Neglecting to do so could cost you heavily as the IRS may take it to mean that you’re trying to hide something, or that it simply isn’t a priority to you.
Communicate with the IRSIf you know ahead of time that you are not going to be able to meet your payment obligations, it’s important that you communicate that to the IRS in advance. Additionally, you should be responsive to all of their efforts to reach you. Keeping in contact with the IRS can help you prevent misunderstandings and shows good faith that you’re willing to comply with their requests.
Know Your DeadlinesOnce you reach an agreement with the IRS, it’s essential to abide by the deadlines they set. Typically, the length of time you have to repay tax debt is based on the type of agreement you’ve reached with the IRS. For example, if you have an installment agreement where payments are paid on a monthly basis, and you owe less than $50,000, you will usually have up to 72 months to pay your back taxes. That said, payment plans vary significantly—you may be required to pay a lump sum or monthly installments—so it’s important to understand the expectations associated with your agreement and make payments on time. If you miss a payment, your business is at risk of losing the established installment agreement, and the IRS may take action to collect your debt in full.
Stay Current on Your Payroll TaxesIn addition to payment deadlines for back taxes, make sure you know the upcoming deadlines for new payroll tax payments. Payroll taxes are paid on a quarterly basis:
- April 30th
- July 31st
- October 31st
- January 31st