The world of business taxation can get very murky. Many business owners turn their operations into LLCs to try to simplify matters. That may work depending on how you set up the LLC, and it does give you some flexibility. But, it is important to remember to take care of payroll taxes as they become due.
An LLC is often considered a pass-through in the world of taxes. This means the business itself is not taxed, but rather the owner is as an individual - which would also apply to multiple owners as partners. The down side of that is, if you violate a tax law you can be held personally liable for any criminal penalties that may come.
Paying taxes is every employer's responsibility
There could be the temptation to think you can avoid paying quarterly payroll taxes to the IRS, but that thinking can get you in deep trouble, personally as well as criminally. The withholding taxes you pay on employees is intended to be put into a trust fund by the government so there will be money there to pay the yearly taxes.
In a memo sent out by the justice department in April of this year, people were reminded that they have a legal responsibility to collect and pay taxes that were withheld in employee paychecks.
Employers are required to account for and pay taxes withheld on employee wages, which includes income tax, Social Security, disability and Medicare. Not only that, but employers must also send in their own portions of the taxes on a quarterly basis.
The consequences of not paying taxes
The IRS is stepping up efforts to ensure compliance with these rules, and will be contacting employers who have fallen behind on payroll taxes.
There are some strong penalties for failing to properly pay taxes on time. It is not just a civil matter that would get you a small fine, or one that you can attribute to the business and not to the owner. There can be monetary fines and even prison sentences if willful misconduct is proven.
People have been sentenced to prison for using employment taxes for personal expenses or to pay other creditors. Some have been convicted of paying employees in cash to avoid employment taxes, and some have been convicted of filing fraudulent claims.
There have also been cases where a person did not know the taxes were not being paid, but were still penalized by the IRS. In one cases a partial owner was found to be negligent and was guilty even though he thought someone else in the company had paid the taxes. If you are listed as the owner, you are liable, and not knowing the taxes are not paid might not be an excuse.