Armanino Blog

Why Paying Your Taxes Late Is a Bad Idea

by Jenn McCabe
February 27, 2018

Business owners pay a variety of company business taxes, in addition to their own personal taxes. Scariest of all, they pay taxes for employees, by withholding income taxes from the employee's paycheck and remitting them to the government on the employee's behalf.

Every business owner has also paid taxes late at some time or another, or at least thought about it. Although this can be a strategic move in some circumstances, it's generally not a good idea. Here are some common situations where you might delay your tax payment―and why you shouldn't.

Employee tax withholding

What's the worst mistake we see? Failing to pay tax withheld from an employee's pay.

Failure to pay taxes withheld on time is effectively borrowing from your employees without their knowledge or permission. We see small businesses do this, and most of the time the owners don't even know it happened! This mistake is often compounded by accounting software that appears to magically simplify the payroll process.

If your accounting staff is inexperienced when it comes to payroll tax filing, they may pay late―or even never―by accident. When cash flow is tight, it is an easy thing to delay or forget. Accounting programs make it seem simple, because they do the math. But it's not always understood that taxes are only calculated automatically―they are not paid automatically. Those taxes need to be remitted to the government, by someone who understands payroll liability accounting, within a matter of days.

The error comes to light at year end when the W2s are prepared, and employees rush off to get their own taxes done. If they discover that the tax withheld on their paychecks never made it to the IRS, alarm bells will sound.

The bottom line? If you have cash flow problems, don't borrow from your staff by failing to remit their income tax withholdings!

Paying quarterly

Many self-employed people, particularly LLC owners and sole proprietors, pay their income tax quarterly, using vouchers provided by their tax preparer. The trick here is to pay four equal installments when possible. (This has a calming effect on the authorities.)

If you have a big balloon payment at year-end or during one particular quarter, be prepared to show the government that you paid tax as you earned the dough. You may have to help your tax preparer annualize your income to prove you paid taxes in the correct period.

For example: If you had a windfall in April, check in with your tax advisor and pay a bigger estimate in the second quarter or be prepared to pay some interest when you file your return a year later.

Late payment as a strategy

Because small business profits can fluctuate and be difficult to forecast, owners often prefer to pay taxes later in the year, when they have a good idea of the business profit. This is a strategy choice, which can also result in interest charges. That might be preferable to paying tax earlier in some cases, but you need to consult your tax professional and have a plan. (You will always be advised to pay the balance by the due date of the return, not the extension due date, or you'll tack on penalties to that interest.)

We advise our clients to earmark funds for tax well in advance and make sure cash flow projections always emphasize cash required for tax. This protects owners from poor decision making. Even if they choose to pay late, they do it thoughtfully and with purpose, and there are no surprises at tax time.

Paying personal income tax via payroll withholding

Business owners can use their personal paycheck to pay income tax and have their taxes withheld just as their staff does. This can be a great strategy.

Ideally, it helps you pay exactly the right amount of tax at exactly the right time. It enables business owners to avoid the use of vouchers, helps them pay taxes when due―but not too early―and leaves the maximum amount of cash in the business or in the owner's pocket. In certain business entities, it can also mitigate the amount of social security taxes paid.

It always comes back to death and taxes

Small business owners often avoid or fail to qualify for institutional loans. Instead, they finance the company by sacrificing their own pay. This makes sense when the company has very little profit. If the business is profitable, however, taxes are inevitable.

So avoid the trap of paying taxes too late. At the very least, it'll add interest to your tax bill. You also might find yourself hit with some pricey penalties.

Contact our experts to learn more about the benefits of outsourcing.

Stay In Touch

Sign up to stay up-to-date with the latest accounting regulations, best practices, industry news and technology insights to run your business.

Jenn McCabe - Partner, Outsource HR - El Segundo CA | Armanino
Related News & Insights
Armaninos 10th Anniversary Reception in Chicago
Live Event
Rooftop reception to celebrate Armanino’s 10th anniversary with the firm’s supporters and friends.

September 29, 2022 | 02:30 PM - 05:30 PM PT
Nonprofit Symposium 2021
Live and Virtual Event
Nonprofits - Get Back to [Focusing on] the Future

September 29, 2022 | 08:00 AM - 12:00 PM PT
Workday Adaptive Planning 2022 R2 Release
Learn about Workday’s newest features and enhancements.

August 30, 2022 | 10:00 AM - 11:00 AM PT