Every entrepreneur struggling to stave off hungry creditors has probably taken a wistful look at that pot of cash set aside from employee paychecks to send to the IRS as withholdings and payroll taxes. Some go so far as to "borrow" that money to pay other creditors, leaving the IRS hanging.
Don't do it. It's very expensive money.
- If you are one day late making a deposit, you have a 2% penalty; and the penalties go up as high as 15%. You also have to pay interest on the late amount.
- If the business goes under before you pay the IRS, the liability doesn't go away. "Responsible persons" who fail to remit withheld taxes for their business can be held personally liable for the unpaid amount, even if the business is run in an LLC or corporation that otherwise shields the owner from liability.
- You can go to jail. Consider this case from South Dakota last year:
The former owner and president of two businesses in Brookings, South Dakota, who collected taxes from his employees and then failed to account for and pay those federal income and FICA taxes, was sentenced November 15, 2010, to 21 months in federal prison.
Michael D. Hoppe, age 60, from Watertown, South Dakota, received the prison term after a May 27, 2010, guilty plea in federal court in Sioux Falls. Hoppe was convicted of one count of failing to account for and pay taxes.
While paying payroll taxes may make it hard to run your business, prison walls make it much harder.