“While good business ideas are plentiful, many entrepreneurs struggle to understand payroll taxes, health care and other thorny issues. ... They don’t have the financial literacy to scale.” – Daymond John, CEO of FUBU

Payroll taxes are the single greatest potential liability for entrepreneurs.

Why? Four reasons:

– Payroll taxes are complicated and don’t add value to the business. So, entrepreneurs delegate this task to others without strong systems to make sure the work is done right.

– The government is slow to act on collecting delinquent payroll taxes. This tempts entrepreneurs to use the government’s money as their own. The slow response allows large liabilities, penalties and interest to build up before the scope of the problem is realized.

– The IRS imposes a penalty on any person who is “responsible” for paying payroll taxes and willfully fails to do so. This penalty is usually 100% of the taxes withheld and not remitted to the IRS. This penalty pierces the “corporate shield.”

– Trust fund taxes cannot be discharged in bankruptcy.

Payroll taxes are called trust fund taxes. These are taxes that your business withheld from your employees and have promised to pay to the government on their behalf. They consist of federal income taxes, Social Security and Medicare taxes. State taxes withheld and owed are also considered trust fund taxes but fall under state rules and regulations rather than those of the IRS.

As you can see from these reasons, making sure payroll taxes get paid should be a top priority of all business owners. Here are some best practices we have found to greatly reduce your risk.

Best Practices

– If you find yourself in a hole, stop digging. This adage is especially true if you cannot pay your payroll taxes. Don’t sacrifice your family’s financial future for a business that is not working out. Life is full of second chances. Live to fight again.

– Know your numbers. Salaries are your largest controllable expense in any organization. Entrepreneurs need to understand the numbers behind every payroll, including the taxes. Is your team generating the gross profit required to meet your financial goals?

– Confirm the amount of payroll taxes withheld and match those amounts to what was paid to the IRS and the states you work in. You can do this online.

– Separate the duties of calculating payroll and authorizing payment.

– Ensure IRS correspondence cannot be detained or altered by someone in your payroll process.

– When paying trust fund taxes, note on the check or electronic payment the specific taxes you are paying. The IRS could apply your payment to non-trust fund liabilities and still pursue you personally for the trust fund taxes.

– Don’t forget that misclassifying an employee as a contractor puts you in the payroll tax trap as well. Make sure you are classifying your people correctly.

There is no way to guarantee that you will never become a victim of payroll fraud, but by increasing your knowledge and following the steps above you can significantly reduce your risk.

We love helping leaders build great businesses. If you’d like to learn more you can check out our free resources at www.valuesdrivenresults.com/resource-library/ or give us a call at (229) 244-1559. We’d love to help you in any way we can.

Curt Fowler is president of Fowler & Company and director at Fowler, Holley, Rambo & Stalvey. He is dedicated to helping leaders build great organizations and better lives for themselves and the people they lead.

Curt is a syndicated business writer, keynote speaker and business advisor. He has an MBA in strategy and entrepreneurship from the Kellogg School, is a CPA, and a pretty good guy as defined by his wife and four children.