Business Tax Attorney and CPA for Illinois Small Businesses

The IRS treats withheld income tax and the employee share of Social Security and Medicare as money held in trust, and it moves faster on unpaid Form 941 taxes than on any other debt. Penalties for late deposits and late filing accrue each quarter, a revenue officer is typically assigned, and the officer investigates who inside the business was responsible for paying. If the business cannot catch up, the IRS assesses the trust fund recovery penalty against those people personally. The first move is to get current on this quarter's deposits, because the IRS will not discuss the old balance with a business that is still falling behind.

A penalty equal to 100 percent of the unpaid trust fund taxes (withheld income tax plus the employee share of FICA), assessed personally against each 'responsible person' who willfully failed to pay. Responsible persons include officers, directors, shareholders, members, bookkeepers, and any employee with authority over which bills get paid; the IRS says even people at a payroll service provider can qualify. Willfulness means knowing the taxes were unpaid and paying other creditors anyway; no bad motive is required. Before assessing, the IRS sends a letter proposing the penalty, and you have 60 days to appeal.

It can seize business assets and accounts receivable by levy. In a case of repeated non-compliance it can seek a court order barring the business from continuing to accrue payroll tax debt, which has the same effect. More commonly it collects from the business while separately assessing the trust fund recovery penalty against the owners, so the debt follows the people even if the business closes. A business that owes $25,000 or less in trust fund taxes may qualify for a simple payment plan of up to ten years without a financial statement.

An LLC taxed as a partnership or sole proprietorship pays self-employment tax on all of its profit; an S corporation pays employment tax only on the owner's salary, with the rest distributed free of it. A multi-member LLC taxed as a partnership and an S corporation both pay the Illinois 1.5 percent replacement tax; a single-member LLC taxed as a sole proprietorship pays none. All of them pass income through to the owner at 4.95 percent. The S election saves money once profit comfortably exceeds a reasonable salary, and costs money below that because of payroll administration. The arithmetic for your numbers is on the S-corp election page.

It is almost always a field audit by a revenue agent at the business or the representative's office, and it covers the whole return rather than a few items. It starts with the books: the general ledger, bank deposits reconciled to reported receipts, and the owner's personal accounts if business and personal money were mixed. Payroll compliance, worker classification and officer compensation are examined alongside income. The firm's audit representation page covers procedure and appeals.

The IRS requires that payments to a shareholder who works in the business be treated as wages to the extent they are reasonable compensation for the services performed, and it reclassifies distributions as wages when the salary is too low. The factors it cites are training and experience, duties and responsibilities, time devoted, what comparable businesses pay for the role, what non-shareholder employees are paid, and whether the company's income comes from the owner's work or from capital and other employees. A documented salary analysis is the defense.

Yes. Businesses that owe $50,000 or less in non-trust-fund taxes, or $25,000 or less in trust fund taxes ($50,000 for an out-of-business sole proprietorship), may qualify for a simple payment plan with up to ten years to pay and no collection information statement. Businesses apply by phone, at a Taxpayer Assistance Center or through the assigned revenue officer; the online application is for individuals. Larger balances require Form 433-B and a negotiated agreement. The plan defaults if a later deposit or return is missed.

Sales tax collected from customers is a trust tax in Illinois, so the Department of Revenue treats the shortfall the way the IRS treats unpaid payroll tax. The business owes the tax with penalties and interest, the Department can revoke its certificate of registration after notice and a hearing (35 ILCS 120/2b), and any officer or employee who was responsible for filing and paying and willfully did not can be held personally liable for the full amount (35 ILCS 735/3-7). If the Department has not yet contacted you, its Voluntary Disclosure Program limits the look-back to four years and removes penalties once the tax and interest are paid; the procedure is on the Illinois Department of Revenue page.