For employers suffering a cash flow problem and not able to make federal payroll deposits on time, many may wonder “am I better off trying to borrow money from the IRS or a loan shark?” The answer to this question, legalities aside, vary.
Who will take a bigger bite? The IRS or a loan shark?
Failure to make the payroll deposits timely are usually an indication of bad internal control or a business facing serious financial problems. And the IRS is there to help…and by “help,” what I mean to say that the IRS will assess horrific penalties if deposits are just one day late.
(Note: this article is not about personal income tax interest rates. The interest rates the IRS charge for those in an installment agreement for personal taxes are much lower)
What interest rates does a loan shark charge?
According to the best answer on Yahoo answers: A Mafia loan shark usually will charge 6-10% per week …
Therefore, for the loan shark loan, If we assume a 10% weekly interest rate, the Annual Percentage Rate (APR) for a loan shark loan is somewhere between an APR of 312-520%
What interest rate does the IRS charge for late payroll deposits?
To find the answer, we go to the IRS Internal Revenue Manual
4.23.9.11 (05-14-2008)Penalty for Failure to Make Timely Deposits
….A four-tier penalty structure was established to encourage depositors to correct errors in a timely manner. Therefore, the amount of the penalty varies according to the time taken to correct the error. The penalty rates are 2% if 1 to 5 days late, 5% if 6 to 15 days late, and 10% if 16 or more days late.
These aren’t interest rates, the IRS is charging, but rather penalties calculated on the missed deposit — so we will need to make some calculations to determine effective APR.
1-5 days late
Let’s say you missed a payroll deposit of $2000 and were one day late. In that case, the penalty is 2% of that, so $40.00 An 2% Daily Percentage Rate. Which turn out to be a 730% APR. An amount higher than a loan shark
However, if you are five days late, the fine stays the same at $40.00, dropping the daily interest rate to 0.4% which drastically lowers the APR to 146%.
6-15 days late
If you are 6 days late, the IRS imposes a 5% penalty. Therefore your effective APR is 304% (5% / 6 X 365) 304%
If you are 15 days late, your effective APR is 121.67%
16 or more days late
If you are 16 days late, the IRS impose a 10% penalty. Therefore your effective APR is (10%/10 X 365) 365%
IRS vs. Loan shark? The IRS is a better deal…most of the time
Most of the time, the penalties the IRS charges for late payroll deposits imposes an effective APR that is usually better than a loan shark. The biggest example of when it doesn’t is in the case of the smallest violation of a late federal payroll tax — a one day late payment imposes an interest rate of 730%…enough to make Tony Soprano blush.
However, the IRS also gets cascading penalties
Let’s suppose you miss one weekly payroll deposit, and then you make the next 51 deposits on time. How many late penalties should be imposed?
The answer is 52! The IRS will cascade the penalties by treating all of them late, instead of just one missed payment. The good news is that you may request these penalties be abated.
Conclusion
Because of the serious penalties that the IRS likes to assess, there is nothing like a payroll tax problem to cause a cash flow bind that will cause another payroll tax problem. This is why any and all options must be on the table when a business is struggling. If you need assistance with a payroll tax issue, contact us. We can help.
