As a business owner, you’re responsible for collecting payroll taxes from your employees using Form 941 and paying those taxes to the government. Failing to do so can result in the Internal Revenue Service (IRS) placing a lien on your business property. In doing so, the government claims a legal right to that property until you pay off your tax debt in full. This can have serious repercussions on your company’s credit, finances, and assets.
Here’s how to avoid or handle a Form 941 tax lien.
Form 941 is called the Employer’s Quarterly Federal Tax Returns. It’s the document employers use to report the quarterly federal income tax, Social Security tax, and Medicare tax they withhold from their staff’s paychecks, as required by the IRS. They also use this form to pay their share of Social Security or Medicare tax. Form 941 requires the following information:
If additional payment is necessary, you’ll submit that with Form 941-V, Payment Voucher.
If you do not submit Form 941 or pay employment taxes for your business, the IRS will send you an official notification called a Notice and Demand for Payment stating its intent to put a lien on the company. This means a lien is imminent, and you have 10 days to pay off your tax debt or make arrangements with the IRS to pay it down.
You cannot sell or refinance any part of your business while the IRS has a lien against it. The lien on your company is also public record until you’ve paid off your debt.
Don’t ignore this notification from the IRS, as a lien on your business can have serious consequences. It applies to all of your existing business properties and assets, as well as any acquired while the lien is active.
A lien can also hinder your company’s credit and ability to get a business loan or refinance. Even if you file for bankruptcy, your debt and lien might still exist.
If your business is incorporated or a limited liability company, the IRS lien only applies to your business property. This includes not only buildings, equipment, and inventory but also intellectual property such as copyrights, patents, and trademarks. If you’re a sole proprietor, however, the government’s lien can apply to your personal property, as well. Your house, vehicles, and more could be at risk as long as the lien is active.
You might also receive a Notice and Demand for Payment letter if you’ve missed the deadline to file Form 941 or unintentionally paid less than you owe. Again, you must pay your full tax debt — plus fees, late penalties, and interest — within 10 days or be at risk of having a lien filed against your business.
Correspondence you might receive from the IRS if you haven’t paid your payroll taxes includes the following:
Take these notices seriously, and respond immediately.
To remove a tax lien from your business, you must pay your tax debt in full. Within 30 days of receiving these funds, the IRS will release the lien. Paying a large amount of taxes at once, however, can be difficult, particularly if you’re struggling financially. If you can’t afford to pay off this debt entirely, you may pursue one of the following options:
You can also appeal the government’s tax lien if you can prove it was issued mistakenly. You must do this right away, however, for it to be effective.
It’s critical that you stay current on your company’s payroll taxes to avoid having the government put a lien on your business and its properties. This involves filing Form 941 on a quarterly basis.