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By Nick Andriacchi

This is a phrase most of us have heard before. For example, businesses with cash flow challenges may choose to borrow from high interest rate sources in order to meet current payment obligations. They justify the practice by believing it is only for a “short period of time”. If the cycle continues and the cash needs mount, Peter eventually catches up to Paul and a whole host of financial (possibly legal) problems arise.

Access to capital is the single most important item to a staffing company that place assignment employees. Most staffing companies need at least six weeks’ worth of accounts receivable financing just to pay its assignment employees and direct payroll costs. They also need 2 – 3 months’ worth of working capital to pay office salaries and fixed expenses. Since most entrepreneurs want to grow their businesses, they will need even more capital to fill additional open orders.

Figuring out where to get the cash to fill open orders is a good problem to have. And there are really great solutions available for staffing companies. But of them is not using payroll taxes for cash flow. It’s tempting – BUT DON’T DO IT!

Uncle Sam is the Owner

Employers are required to withhold income and social security taxes from employees’ paychecks and timely deposit those funds. These are considered trust fund taxes. In other words, because the employer is taking control of the employee’s money for the employee’s taxes, the employer is treated as a fiduciary for those funds.

Statutory Payroll Tax Deductions

The law requires that payroll taxes must be withheld from an employee’s paycheck each pay period. Employers must then transmit these withholdings to various tax agencies. Payroll tax deductions include the following:

  • Federal income tax withholding

  • Social Security tax withholding

  • Medicare tax withholding

  • Additional Medicare tax withholding (for wages over $200,000)

  • State income tax withholding

  • Various local tax withholdings, such as city, county, or school district taxes; state disability; or unemployment insurance

Responsible person liability

A corporate officer is not generally personally liable for the debts of the corporation.

Trust fund tax liability is an exception: the corporate officers or agents who could have and should have paid the funds to the taxing authorities are held personally liable for the taxes.

Granda Hills Community Hospital Case

That’s what happened to James Doulgeris in a past case. He was appointed interim president and CEO of a hospital that was in bankruptcy. According to a district court opinion, the hospital was already delinquent in its payroll taxes when he took over. Yet he had authority to sign checks, and in fact signed checks totaling millions of dollars to other payees while the payroll taxes remained unpaid. Despite his argument that the CFO was the person in charge of deciding whom to pay, the court found that Doulgeris was a “responsible person” and entered judgment against him in the amount of nearly $2 million. He was later dismissed from the case – but what a terrible experience. Source: Modern Healthcare

Trust Fund Recovery Penalty

This is the penalty the IRS can hit you with even if you aren’t an owner or someone who otherwise might benefit financially from the failure to pay these taxes. If you could have caused the employer to pay the taxes and you failed to do so, you can end up on the hook for the entire amount.

The lesson: when your business needs cash, make sure the payroll tax is paid, even if other creditors are screaming for their money.

Solution: An Outside Payroll Processor and Funder

An outside payroll processor will take away the temptation of diverting money due the IRS to other expenses. Payroll processing companies accrue for all payroll taxes the week they are incurred. While these type of companies “keep things straight” with the IRS and other government taxing agencies, they will not provide cash to help grow your business.

For a complete solution, turn to a full-service payroll funding company. They will not only process payroll and deposit tax money, they will fully finance payroll growth due to an increase in business. Increased business equals larger profits for your company without having to rely on Peter’s money.

Simply put: a payroll funder will supply an infusion of cash that gives a staffing company the ability to pay Paul while staying on Peter’s good side! And when Peter is the IRS that is the only side you want to be on.



Blog post shared by Nick Andriacchi, Advisor at Madison Resources

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