If I cannot make payroll, can I use money I have put aside to pay withholding tax to pay my employees or operating expenses in order to keep the business open?

On: May 24, 2019

NO! The IRS views this as stealing from the government and from your employee. These funds are being held in trust for the employee to pay his/her taxes. This is the most common way that small businesses with employees get in trouble with the IRS. While the small business owner may view his activities in getting the payroll paid, no matter what, as positive, the IRS spends its time shutting down businesses that engage in such activity. They refer to it as “stopping the bleeding.” The penalties for engaging in this activity are high, and IRS Revenue Officers and Agents are quickly assigned to such cases to collect such funds, stop this conduct and monitor the business to prevent it from happening again. Many small business owners find themselves in engaging in this activity financial quarter and quarter. They are scrambling to keep a business open despite continuing quarterly losses. They continue to withdraw funds from the payroll tax withholding account to actually make payroll, wither out of loyalty to their employees or pride in their businesses. The IRS does not look at it this way. They refer to this conduct as “pyramiding” and treat as criminally fraudulent activity. Prison sentences can be as long as five years with substantial criminal penalties, in addition to already existing IRS penalties and interest. The IRS has no interest in seeing anyone go to jail. They are a collection agency and it is unlikely you will be able to pay your tax liabilities if you are in jail. They can, and will, move quickly to shut down any business that they find “pyramiding” and paying out of the payroll withholding account to pay payroll and other expenses, instead of using these funds, entrusted to the employer, to pay their employees’ taxes as they are supposed to. If you have engaged in such conduct, but not on a regular basis, the IRS will collect taxes, penalties and interest due, and look to see that procedures are put in place to prevent it from happening again. There are no settlement procedures, such as an Offer in Compromise, for such tax liabilities if one wants to keep the business open a-is and on an ongoing basis.