When a small business encounters tough times, it is not uncommon for the business owner to do what is necessary to keep the business alive. The obligation to keep the business going for family and employees is strong, and can often result in the business owner making decisions that create personal financial hardship.
Small business owners are required to withhold taxes from their employees’ paychecks and pay the Internal Revenue Service (IRS). Employment taxes consist of two parts: (1) the employer’s portion, and (2) the employee’s portion. The employee’s portion is withheld from the employee’s wages by the employer, and consists of a 6.2% Social Security tax and a 1.45% Medicare tax. The employee’s portion is held in trust by the employer until it is remitted to the IRS. The employer portion of the tax is paid directly to the IRS. This obligation is comprised of a matching contribution of 6.2% as Social Security tax and 1.45% as Medicare tax.
When an employer cannot pay the IRS, things can go south very quickly. The IRS can close a business for failure to pay employee taxes, and can attempt to collect personally from each owner or manager responsible for withholding and paying the tax (known as a “responsible person”). The IRS can collect 100% of the debt from each of the responsible persons until the debt is paid. Usually this results in owners and officers pointing out each other’s personal assets in a “get him not me” effort to avoid payment. This can be very nasty business.
The federal bankruptcy laws can help manage this impossible situation. While in some cases an individual can file bankruptcy and discharge the employer’s portion of the tax debt, the employee’s portion is not dischargeable. However, bankruptcy allows the debtor to propose a plan to repay non-dischargeable payroll taxes, often without stopping business operations.
If you are a small business owner with an employer payroll tax problem, consult with an experienced bankruptcy attorney and discuss your options. The federal bankruptcy laws may be able to provide the time and opportunity to repay your tax debt and continue your business.
Fears & Nachawati Law Offices