There are many “vectors” pulling on the owner of a small business. You have to market the company, get the business, do the work, and get paid. The sales to payment cycle can be months long, during which you have to manage the cash flow to cover your costs and pay your employees or sub-contractors, before you can take money for yourself. One of the many non-billable tasks that you might de-prioritize are employment taxes. We saw that even someone as senior and experienced as the president of the Federal Reserve Bank of New York overlooks such requirements. It came to light during Timothy Geithner’s recent confirmation hearings before the U.S. Senate to be Treasury secretary that he failed to pay self-employment taxes during the early part of this decade. While all ended well for him (he paid the back taxes and interest, and was confirmed for Treasury Secretary, at least by the committee so far), it is not clear if it would end as well for others of us.
A word to the wise
While I don’t think I will ever be nominated to a cabinet level post, on the other hand, I don’t ever want to get a nasty note from the IRS claiming I owe taxes, or be asked in front of a large public audience about such alleged violations. So first a word to the wise – claim the income and pay the taxes. If you are incorporated, then my understanding is that you cannot just take funds against owner’s equity. Rather, you must pay yourself with a payroll check. Disclaimer – I am not a lawyer or an accountant – so please check with a real professional. This has always been my practice. Now many accounting programs have the ability to write paychecks. You can subscribe to that software firm’s service, so that you can get the most current tables for the appropriate city, state and federal taxes. For those who are used to receiving paychecks from a “day job”, those are all the “deductions” you see in your paycheck.
So, using these software programs, it looks easy, right?
However, a few things. First, when you withhold money from employees (even if it is just you the owner), you need to send this money to the government ASAP. You cannot just write a check, as they need “good money.” These days, you can do that in various electronic ways, including some credit cards. Also, the penalty for failing to withhold the correct amounts are non-trivial. They are several hundred dollars. Such fines are likely to increase, given our government’s need to find funding from any source to meet current deficits. Finally, sometimes, the government agency makes a mistake in how they credit the deposit. You will become aware of this with a nasty letter from the government agency, which may be particularly challenging to understand especially if you think you did the right thing. Psychologists must have a word for punishment for seemingly correct behavior – but it certainly leads to stress on the part of the small business owner (reference first paragraph again – you don’t get paid for spending hours on the phone with your government.)
What is the alternative?
You can either pay an accountant or use a payroll service to do the calculations and prepare your checks. Do you think that their prices seem high for something you think you can do from your keyboard with a relatively inexpensive program? I can tell you that more than once, the government has made one of those mistakes in crediting my firm’s payments. Even before I knew it, the payroll service knew it, and sent me a letter that said “Don’t worry. We got it. We’ll take care of it.” That letter was like a Valium® pre-treatment for me, so that when I got the letter from the government claiming I did not make a payment, I had no stress at all. I knew it was already being managed by professionals.
Those of us in the service business sell our customers on why it is worthwhile to pay us to provide professional service in our area of expertise. So why shouldn’t you do the same with your payroll?
Gary D. Novack is president of PharmaLogic Development Inc. of San Rafael, CA, a Regent Emeritus of the University of California, and a regular contributor to The Daily Anchor.
Photo credit: amichaelmurray
