Money Matters: 941 Taxes -- The Forbidden Fruit

By Ron Caron The Daily Record Newswire As the economy continues to amble about like a concussed boxer, many businesses have seen cash flows dry up. In these down times, business owners are faced with many tough choices. One of the worst decisions during a recession is to use employment taxes, withheld from the company's employees, for the payment of business creditors. Be forewarned, the Internal Revenue Service is not just another creditor. Employment taxes, sometimes referred to as 941 taxes, are assessed on earned income. These taxes comprise an employee's estimated federal income tax and the FICA taxes (Social Security & Medicare taxes) assessed on the employee's income. In the typical employment situation, the employee contributes one half of the total FICA tax assessment with the employer picking up the other half. The portion of 941 taxes constituting the employee's estimated income tax and his one half of FICA taxes are referred to as "trust fund" taxes because the employer holds these funds "in trust" on behalf of the employee for ultimate payment to the IRS. In essence, the employer is serving as collection agent for the IRS. Employment taxes are referred to as "941" taxes because that is the number of the form used by an employer to report such taxes to the IRS. Form 941 is filed on a quarterly basis. However, the remittance of 941 taxes to the IRS is often required on a more frequent basis. In short, the IRS does not like to wait for its money. When the economy slows, one of the first symptoms felt by companies is a decrease in revenues. Lower revenues put pressure on business owners to make difficult decisions. In response to decreasing revenues, and in trying to maintain the bottom line, the business must find ways to generate additional revenues, decrease costs, or do a combination of both. Some of the options to increase revenues might include revitalizing the sales force, instituting a new marketing plan, adding advertising, or rolling out a new or improved product line. On the other side of the ledger, options to decrease costs might include renegotiation of supplier contracts, changes to delivery services, relocation or consolidation of facilities, and even a reduction in compensation or work force. Certainly these revenue and expense options are not exhaustive and often the best approach is for the business to implement a little of both strategies. However, some business owners employ a dangerous third strategy: They use the money set aside for the trust fund taxes to pay other expenses. Now, this tactic is seldom used with the intent of permanently denying the IRS what it is due. Most business owners simply intend to just "borrow" from the trust fund tax account to get through a short-term crisis and plan to replenish it and remit payment when the emergency has passed. Some business owners figure that failure to pay suppliers on time will have a more immediate impact on their ability to stay in operation. If vendors don't get paid, they won't supply the inputs needed by the business to create its product. Without product to sell, there is no revenue. Without revenue, the business must close its doors. On the other hand, as the business owner continues to rationalize his use of this "borrowing" strategy, he may take a sort of false comfort in delaying payment to the bureaucratic machine responsible for tax collection from a populace now in excess of 300 million. After all, it is easier to ignore the litany of IRS notices of increasingly terse prose than it is to cut off the immediate supply chain for the business. This short sightedness can, and often does, have devastating results. Continued "borrowing" from the trust fund tax account is tempting because of the lack of immediate consequences. Doubling down on a bad decision is even worse. The IRS will eventually catch up to you, and when they do, your options will be limited and unpleasant. The primary reason why borrowing from the 941 tax account is ill-advised is that the trust fund portion of these taxes can be assessed personally against the individuals who are "responsible" for the collection of these taxes and who are "willful" in their failure to remit the same to the IRS. This is known as the "willful & responsible" test. This means that regardless of how the business is structured (i.e. a corporation, an LLC, or a sole proprietorship), the liability for the payment of the trust fund taxes falls on the responsible owners and officers of the company. The normal rules of liability protection, in the case of corporations and LLCs, are of little consequence when it comes to the assessment of trust fund penalty by the IRS. The IRS can collect the full amount of the tax from any one, or all, of the responsible owners and officers. The liability is not pro-rated amongst the responsible individuals, the IRS can pick and choose which ones to pursue through collections. It is important to note that the trust fund penalty, once it is assessed on those individuals deemed "willful & responsible," is not dischargeable in bankruptcy. If full payment cannot be made immediately, the IRS will often seek to establish a payment plan. Those who continue to ignore the IRS will soon feel the pain of collections. Here again, the normal rules of creditor protection do not apply. Unlike a general creditor, the IRS possesses extraordinary powers to collect against assets that might otherwise be protected from a general creditor. Don't think that your retirement account is safe from the IRS, because it is not. If you are considering a "loan" from the 941 tax account, my free advice to you is don't do it. If you have already taken one or more "loans" from the 941 tax account, you should stop immediately. If you have started to receive notices from the IRS regarding your "loan" from the 941 tax account, your next phone call should be to a lawyer to assist you with getting the business back on track and negotiating a payment plan. The worst thing you can do if you find yourself in a hole is to keep digging. ---------- Ronald G. Caron, Jr., J.D./LL.M, is principal at RGC Tax & Estate Solutions, PLLC of Boise, Idaho. Published: Thu, Sep 15, 2011