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Don’t ‘call in sick’ to avoid employment-tax obligation

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in Discrimination and Harassment,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

If the 100 percent federal employment tax penalty doesn’t strike fear in the hearts of small business owners, it should. Why? That tax-code provision requires the person “responsible” for unpaid employment taxes to personally pay 100 percent of the amount withheld from employees’ paychecks. (That’s why it’s called the 100 percent penalty.)

You’re still potentially on the hook for the 100 percent penalty even if you delegated the job to someone else or you otherwise thought the taxes were paid on time. You can skip out on the tax bill only if you can show that your failure to pay was due to reasonable cause and not willful neglect.

Alert: Illness or disability is generally not considered “reasonable cause.” As a recent court case shows, illness doesn’t absolve you of the responsibilities in this area.

Here’s what happened: Due to severe health problems—including obesity, high cholesterol, diabetes and gout—a company CEO started cutting back his hours in 1998. In 1999, he suffered a heart attack, followed by an angina attack the subsequent year.

Nevertheless, the CEO still exerted significant control at the company, including the ability to write and sign checks, choose one creditor over another and supplement corporate accounts with personal funds.

Yet his company still failed to pay its employment taxes. After looking at all the facts, the District Court imposed the 100 percent penalty on the CEO. (Savage, DC-Cal., 2/22/06)

Advice: Even if you’ve assigned the job to a tax pro, you can still get walloped if the taxes aren’t paid on time. So, follow these simple safeguards:

• Make one employee responsible for paying the taxes and another for verifying the payments.
• Assign backups to both employees in case of illness, vacations or other absences.
• Require those employees to issue a report to you (in paper or e-mail) stating that they completed the responsibility. • Circle the payroll deposit due dates on your desk calendar or use another visible reminder.
• Keep our 2006 Federal Tax Calendar handy.

Last, but not least: Check your books and tax records to see that payments were made on time. It’s your money at stake here, so the onus is on you.

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