In this segment of #TheMoneyFactor, Ian Varley and Dave Olsen discuss what to do when a small business owners falls behind on 941 payroll taxes. Watch below:
Falling behind on 941 payroll taxes
Invoice factoring can help a small business get out of a tax lien if that business has fallen behind. Not only can you remove the lien from your business, but you can also avoid the situation in the future by building a reserve of cash.
A 941 tax form is also called the Employer’s Quarterly Tax Form. This tells the IRS how much in taxes are to be paid from each employee. The IRS reports that more than two-thirds of its revenue comes from payroll taxes. This means that there is heavy incentive for the IRS to penalize companies for failure to file or pay payroll taxes. Failure to pay your 941 taxes will result in financial penalty in the form of interest rates and a sum penalty of 2-15% of the amount owed. Additionally, the IRS could file a tax lien, severing your business from popular business financing options like a bank loan.
What happens if you fall behind on payroll taxes?
One way of getting rid of a tax lien on your business is establishing a payment plan with the IRS. These installments will require a financial penalty as well as interest to the amount owed, but over time your business should be able to pay back the money to the IRS. It is crucial not to default on this payment plan. That may mean the end of your business.
Avoiding defaulting on your IRS installments may require business financing to fund through an IRS tax lien. Be wary of merchant cash advances or online loans that advance your company a sum of money and require daily, weekly, or monthly repayments. These small business financing options may hurt your cash flow rather than strengthen it.
Paying off the IRS:
Consider invoice factoring as a financing option to pay back the money owed to the IRS. Not only do you get out of the problem, but you avoid it from happening again. This works by improving a business’ cash flow, and enabling growth in sales, products, or employment. Further, you create a reserve of capital to ensure it won’t happen again.
Factoring typically generates enough cash from receivables to pay off the tax lien. This is mutually beneficial. Your business gets a large cash flow strain taken off, and the invoice factoring company has a partnership with your business to continue providing strong cash flow. It depends on each situation how a factoring company may handle financing a business with an IRS tax lien, but one method is with a subordination from the IRS to the factoring company for claim on the receivables. This means that the factoring services can work to advance payment to your business from open invoices, and the IRS receives payment from your business that now has strong cash flow.
941 Payroll Tax Lien Solution
Falling behind on your 941 payroll taxes is expensive. If it does happen, though, be sure to take care of it as soon as possible. You do not want to get into a cash flow hole where the installments and interest owed are more than your business can afford. If you do fall behind on your payroll taxes, give Eagle a call. Eagle Business Credit is an invoice factoring company in Woodstock, Georgia that works with small business owners to pay off the IRS and be on time with payroll taxes.