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3 Reasons to Emphasize Payroll When Your Company Has Cash Flow Delays

Tyler Winn

Data from multiple sources reveal that about half of small businesses run out of gas within the first five years. Postmortems have been performed on failed firms to establish the causes of their “death” and one culprit has always stood out – cash flow problems.

While any business can experience a financial crunch, startups and small businesses are particularly vulnerable to cash flow problems. There are various reasons why new and small businesses tend to run out of money even when they’re doing well. They include:

  • Startups have to spend money up-front on important activities such as product development, testing, and marketing. All these activities take time and consume cash, but don’t immediately generate any revenues.
  • Startups can take a while before making their first sales. These businesses incur recurring costs, such as rent, payroll, and other expenses, even without getting any revenue in return.
  • Since startups don’t usually have a proven track record for paying bills promptly, suppliers may demand advance or immediate payment.

Regrettably, many business leaders don’t have sound processes in place to forecast cash flow problems. Then, when their cash reserves run dry, they watch helplessly as their businesses join the 50% of businesses that fail.

How to Prepare for Months with Tight Cash Flows

Fortunately, there is something small businesses (especially seasonal businesses) can do to prepare for months with tight cash flows – maintaining cash flow analysis. As a business owner or leader, you need to examine past patterns in regards to revenue and expenses. You should then build your budget for the following months based on that. For the following months, it’s best to underestimate revenue and overestimate expenses.

Why Payroll Taxes should be Top Priority Even When with Cash Flow Problems

When your business first runs into a financial crisis, you may think that the only way to save it is to skip a few payroll tax payments until your cash flow picks up. Two words: Bad Idea! Missed and late payroll taxes are among the things that get the IRS pretty worked up. You don’t want to get on the wrong side of the IRS.

So, even though payroll taxes are the number one most financially burdensome federal tax among small firms, according to the National Small Businesses Association (NSBA), you should never consider skipping them. Here’s why:

1. Late payments incur penalties

Making payroll tax payments past the due date incurs penalties. To get square with the IRS, you will be forced to pay penalties on top of the original tax liability. Keep in mind that the IRS penalties include any other state penalties you may be obligated to pay.

The penalty for late payment depends on two factors: how much you owe, and how late the payment is. Take a look:

No. of Days LatePenalty
1 to 5 day2%
6 to 15 days5%
Over 16 days10%
10+ days after initial IRS notice 15%

Keep in mind that if income, Medicare, and Social Security taxes are not paid, the business owner may be liable for the Trust Fund Recovery Penalty, which is equal to the unpaid balance of the trust fund tax.

2. Missed payments incur interest

If you thought that penalties were the only thing to fret about when you miss a payroll tax deposit deadline, think again. Missed payments also attract interest rates, which can range from 3% to 6% of the total amount owed.

3. Evading payroll taxes could send you to jail

Penalties and interest rates aren’t the only things to worry about when you fail to keep up with payroll tax payments. If the IRS has cause to believe that you’re deliberately evading payroll tax, you could owe a sizeable penalty (up to $10,000), be subject to jail time (up to 5 years in prison), or both. The IRS could also file a tax lien (a claim against your property) against a person or business that’s guilty of “willful failure” to pay payroll taxes.

4. Incorrect filing attracts penalties

A business owner could also face other payroll-related penalties other than the ones described above. For instance, you could be penalized for classifying workers as independent contractors instead of employees. Another mistake that could attract IRS penalties is failing to provide information returns to employees and other payees.

Of all creditors that your business has, the IRS is probably the most aggressive. Other creditors may understand that you have cash flow delays. The IRS won’t. So, you should prioritize payroll and payroll taxes, even if it risks the business going further into debt, or letting employees go.

Why You Need to Hire a Payroll Service

NSBA also ranks payroll taxes the second most administratively burdensome federal tax among small businesses. Unless your in-house accountant or bookkeeper is incredibly good at his/her job, you cannot risk delegating this super-sensitive and mind-boggling task to a novice.

So, just because you pay payroll taxes promptly doesn’t mean that you’re out of the woods – at least not until you’re sure that your payroll is handled expertly. To stay on the IRS’s good side, you need a competent expert to take care of payroll taxes along with the rest of the payroll hassle.

Even with cash flow delays, hiring a payroll service will prove to be the best decision for your small business. This is because professional payroll service providers are experts in the challenging world of federal tax regulations. A reputable outsourced payroll provider has a team of experts that’s up-to-date with rules, regulations, and changes in tax charges. So, they will handle your payroll and payroll taxes expertly, leaving no room for mistakes that can subject you to IRS penalties hence denting your business financially.

Are you looking for a competent payroll service provider? Cirrus Payroll can provide a full, confidential payroll service for your small business. Contact us or call us today at (918) 948-9923 to find out more about our payroll service and how we can help you with your payroll needs.