It is hard enough to run a small business without having payroll issues. As one Maryland business owner said, it is better to be out in front of customers than stuck in a back room figuring out state and federal employment taxes. But the service is not cheap, and the loss of the service, depending on the circumstances, can be a nightmare.
In this man’s case, his 15-employee company is just one client of a Baltimore-area payroll and tax firm that closed its doors recently. The firm is filing for Chapter 7 bankruptcy, and its customers will see very little of their money back. Worse, the firm is facing an Internal Revenue Service investigation for fraud: The company allegedly held on to money that it was supposed to send to the IRS to pay clients’ tax bills.
Now, the clients are on the hook with the IRS for tens of thousands of dollars each. One woman whose family owns a small flower shop says her business owes $22,000 in back taxes. In the same boat are small veterinarian offices, dentists, construction firms and other small businesses that have relied on the payroll firm for more than a decade to process paychecks and pay taxes.
Payroll companies seldom go the bankruptcy route, according to one insider. Most of the time, a larger firm or one of the three firms that dominate the industry nationwide will purchase the book of business from a struggling firm.
Unfortunately, when a third-party payroll company goes under, regardless of whether there is criminal activity involved, its clients are not relieved of their tax obligations. According to the federal tax code, the clients still have to pay taxes, penalties and interest. The downstream ramifications of this company’s bankruptcy may be felt for years to come.
Source: Wall Street Journal, “Tax Surprises Can Follow When Payroll Firms Implode,” Angus Loten, April 24, 2013
Our firm helps businesses with bankruptcy issues. Please visit our website for more information about our Maryland practice.