June 4, 1998

THE IRS EXTENDS AN OLIVE TWIG TO SMALL BIZ

Small-business owners are renowned for their hatred of the IRS's red tape, and perhaps the regulation that most raises their ire is one governing the deposit of payroll taxes. Every month, each company with more than $500 in quarterly employment taxes (which covers all but the tiniest of outfits) must deposit those funds, in person, at a participating bank. For years, that has meant long lines and even shorter tempers, as company owners, or one of their charges, trudge off to the closest branch.

Some small-biz owners, however, will soon be seeing less of their local tellers. The IRS announced on June 3 that it's raising the threshhold for mandatory monthly payments from $500 to $1,000. That means any company that pays less than $4,000 in annual payroll taxes can simply mail in the payments with quarterly tax returns instead of making 12 separate bank visits a year.

The IRS estimates that this will cut red tape for some 500,000 of the nation's 6.2 million employers. Perhaps more significant is that small companies will be able to hang on to their tax dollars longer, which could offer a small boost to perennially cash-strapped entrepreneurs.

"A lot of people don't want to have to deal with payroll," says Debbi-Jo Horton, an accountant for small businesses in East Providence, R.I., who is the New England tax representative to the White House Conference on Small Business. "They either pay an accountant or a payroll service to do it. They'll now be saving themselves that fee."

IRS Commissioner Charles O. Rosotti hailed the small measure as "only the beginning of what [I] hope to accomplish at the IRS for small business."

Maybe so, but just how many companies will be affected by the new measure? The $4,000 annual tax threshhold is relatively tiny, considering it includes all of an employee's salary withholding, Social Security, and unemployment taxes. A company employing more than two or three full-time, minimum-wage workers would likely exceed that mark. And it's back to the bank lines for any company contracting a part-time worker at, say, $15 per hour.

While applauding the move, a congressional aide to Senate Small Business Chair Jim Talent (R-Mo.) suggests that the rule change was intended as "window-dressing" by the IRS, which has traditionally skirmished with small-business advocacy groups.

Indeed, under intense congressional scrutiny, the IRS has suffered from enforcement horror stories related by small-business owners. The new threshhold could be viewed as the first of many steps to patching its relations with small biz.

If so, it's a strategy that has yet to capture the loyalty of Congress. The aide to Senator Talent says the IRS still has a long way to go, especially on evergreen issues of health-insurance deductibility, independent contracting rules, and mandatory electronic tax payments. In short, don't look for the new changes to make bosom buddies of the IRS and small business overnight.

By Dennis Berman
Staff Reporter
Business Week Online