If you've recently made the decision to close your small business due to inadequate cash flow or low profit, you may be feeling equal parts dismay and relief. However, depending upon how quickly you began the closing process when you realized your business was unsustainable, you may not have enough excess cash to pay even the final bills -- including your business's income and payroll taxes for the last few months. What should you do if you can't afford your business's tax bill? Will your personal wages be garnished when you begin working at a job? Read on to learn more about how post-closing business taxes are handled.
Will you be personally liable for your business's tax debt?
If your business was incorporated as a company or limited liability company (LLC), one of the primary benefits you likely received from this arrangement was the ability to avoid personal liability for legal claims relating to your business. If a customer were to slip and fall in your business, he or she could sue the LLC and recover any costs from your business's insurance policy; but the customer could not sue you personally.
Taxes are handled a bit differently, and simply because your business structure is designed to limit liability doesn't mean you won't personally be on the hook for unpaid payroll or business income taxes. The federal government is clear that any unpaid (or collected but undeposited) payroll taxes can subject the responsible person to up to a 10-year IRS lien and other types of garnishment. This is true even for business officers (like CEOs), not only small business owners. If you continue to fail to pay these taxes, the federal government may garnish your eventual Social Security check and any income tax refunds until this debt (along with associated fines and costs) is fully paid.
What should you do if you're having trouble paying your outstanding taxes?
If you've found yourself in this situation after closing your business, it's important to be proactive. The IRS is often willing to work with consumers and business proprietors to come up with a mutually-agreeable repayment plan -- but seeking out such a plan yourself gives you much more control over the process than allowing the IRS to obtain a civil judgment against you to garnish your wages or freeze other assets.
You'll want to consult a tax attorney who is experienced in entering into tax settlements. He or she will be able to evaluate any offers you receive to determine whether they are truly in your best interest or if the IRS and your state's revenue agency are overreaching.
The type of settlement or payment plan available to you largely depends on the type of tax debt you have. If you've failed to pay your business's regular income taxes during your final year of operation, you may be able to come to an agreement with the IRS allowing you to pay a reduced amount if you can establish hardship and agree to make regular payments toward the debt.
If you've withheld (but failed to pay) payroll taxes from your employees, including FICA, it's unlikely you'll be able to get by without paying the entire amount you owe. Because the Social Security Administration uses collected FICA taxes to determine whether an individual is qualified to receive Social Security Disability or retirement funds, if this amount is skewed, it could potentially shortchange the employees involved when it comes time to file for Social Security benefits. However, you may still be given an extended period of time to repay these funds without facing legal action. Your attorney should be able to advise you on how to proceed.