Chapter 15 – Pay Your Taxes, Dummy

No offense to the readers out there, but if you do put off paying your taxes, you are a dummy.

Now, I know all of the arguments against paying taxes.  I know how unfair it seems that small businesses, arguably the million little engines that truly drive this country, should get saddled with such high taxes.  I know how cruel and unjust it seems that you, yes you, the one who had the guts to set out and create your own business has to pay extra tax!  Outrageous!  Scandal!

No, this is neither outrageous nor scandalous.  It simply is.  Sure, you can get quite a fury of complaints going if you really think about it, and you could probably get most business owners to join in with you.  But, I would ask you, how does that help you?  Does complaining about your tax burden lessen it in any way?  No, it just makes the checks harder to sign.  My advice is to simply accept taxes as a reality of doing business, and do your best to work with them.  Besides, all the time you spend thinking about how you are being wronged, and how unfair our system is, someone else is out there thinking about how to gobble up your market.

So, since we really can’t do anything with taxes (other than work on our own attitude), we just need to accept them.  Because, although taxes are a necessity of doing business, they do have their dark side.  That is, taxes are one of the most, if not the most, important business obligations you have.

Sure, lots of things can seem more important.  Plus, probably no one will even notice if you did not pay this quarter’s payment exactly on time.  Your employees will sure notice if you miss payroll (by even a day).  Your landlord will notice if you don’t pay your rent.  Your customers will notice if you don’t process the credits for their returns.  However, taxes have a unique way of always hanging around.  Sure, they can be silent for a while, but if left unpaid long enough, they will get noisy, really noisy.

This goes double-especially with federal taxes.  I like to think of the fed as a particularly street-smart and tough pimp.  The fed will get paid.  Somehow, sometime, somewhere, they will get paid.  And, the longer you wait, the more you get hit with penalties and interest, and if you couldn’t pay before, you are in real trouble now.

But, I can hear some of you asking, what am I supposed to do if I have to choose between paying payroll and paying payroll taxes?  Well, you pay both.  You pay both by ANY means necessary.

As entrepreneurs, we have to remember that our greatest strength can also be the source of our greatest weakness.  We are glass-half-full types, we firmly believe that the future will always be better than the present.  We believe that we can always make things better, that we have the true ability to overcome any obstacle.  This mindset has gotten us to where we are.  Starting a business is hard.  Running a business is even harder.  We have already overcome a 1,000 problems and reasons why we could fail and we went ahead and did it anyway.

All of this is wonderful, and this mindset allows us to do amazing things.  However, this mindset can also get us into big trouble.  It is very easy for us to skip things like tax payments when times are tough, because in our minds, we can easily work around it.  No one will know if we paid exactly on time or not, so I can just make it up next week.  Besides, this is a payroll (or rent, or state taxes, or whatever) week.  Next week will be so much easier, so I will just pay it then.  And, after deciding to do this, we feel better.  We have solved another crisis.  Boy, are we smart.  Yes-sir-ee, yet another problem soundly squashed.  Hooray for me!  Time for a cookie!

But, there is a problem.  Yes, no one may notice that your taxes are late.  However, you, my brilliant friend, are not asking yourself the most important question.  You see, you have a business infrastructure problem.  You do not have to the cash flow to cover your necessary expenses.  Is this truly a fluke, some seasonal affect that happens every year, or is there a bigger problem?  Often, missing necessary events are crucial warning beacons that something is wrong, perhaps very wrong with your business.

Missing these payments is often just a symptom of a bigger malady inside the business.  As such, when circumstances like this arise, you need to ask yourself (and find out) what is really going on?  Missing necessary payments is often the first sign of a business in trouble, is that what is going on?  Is this a fluke, or is this the beginning (or the continuation) of a trend?  Is the business as strong as I think it is?  Have I built part of the business on a sand foundation that is starting to shift with the wind?

Of course our optimism is a wonderful thing, but we need to make sure we are not ignoring some important realities in our business.  If you cannot afford our taxes, you cannot afford your current expense load.  Are you overstocked (either in inventory or in employees)?  Is your office space reasonable for what you are doing?  If you are paying premium rent for a premium space, are you getting a return?  Do you really need everything you are paying for?  If you were looking at your current financials when you were starting the business, what would you change?

Now after you have asked yourself these questions, the critical thing to ask yourself next is what can you do about them. Perhaps the answer is nothing.  But, odds are, there are options, lots of options, to fixing your problems.  However, you will never know what those options are until you are honest about the problems, so being brutally honest when you ask yourself these questions is very, very important.

On top of missing necessary payments being a possible sign of trouble, tax payments (especially federal) have a unique ability to follow you around.  There is no bankruptcy protection from back-taxes.  And, if you are missing payroll tax payments, you not only expose yourself to some wonderful penalties (especially if you are not filing too), but you also put yourself (and your family) on the hook, forever, to pay them.

Even if you are a corporation, you will still always be liable for the employees’ portion of payroll taxes.  And, if you are a sole-proprietor (this includes single-member LLC’s), you are personally responsible for the whole enchilada.  And, this responsibility does not go away.  Technically, the IRS has ten years to collect from the date a debt is assessed.  However, many debts are not assed until far after they are due.  As an example, I had one client that was still dealing with payroll taxes from the early 1970’s in the year 2010.

Taxes will haunt you like a high-maintenance hobgoblin until you do something about it.  So, pay your taxes, dummy.