Small Business

Can Factoring Help with Employment Taxes?

Posted by Factor Funding Co. on January 7, 2016

Employment Taxes

When running a staffing agency, one of the main expenses involved is employment taxes. These are the taxes that you owe to the IRS for each employee on your payroll. It is a major expense that can often drain your cash every time you have to make a payment. But, falling behind on payroll taxes is one of the worst things an agency, or any small business, can do. 

Factoring can help you stay current on your employment taxes, and get caught up if you need to. 

Cash Flow is a Common Staffing Agency Problem

Do you often struggle to meet your monthly expenses? Have you ever faced a time when making payroll might not happen? If so, you are definitely not alone in the staffing industry. Small agencies often face cash flow issues. They can happen for any number of reasons: 

  • Another agency entices one of your biggest clients away. 
  • One of your largest customers suddenly starts paying invoices slower than before.
  • The local market slows down dramatically. 
  • You have to come up with a large amount of money unexpectedly. 

When an agency gets into financial trouble, emergency mode kicks in. Redirecting money from employment taxes is one way to get out of financial trouble. But, it is a slippery slope. Employment taxes can add up to a large amount of money very quickly. When an agency gets behind on these taxes, it can be difficult to get caught up. 

If the agency cannot get caught up on its obligations with the IRS, problems start to mount. The IRS can put a lien on the business' assets, including its accounts payable. They can seize assets if it comes down to it. 

Factoring Can Help Your Agency Meet Its Employment Tax Obligations

When is your next employment tax payment due to the IRS? Most businesses pay these taxes quarterly. Are you going to have the money to make that big payment? 

If your cash flows are making it difficult to meet your payroll tax obligations, you need to learn more about factoring. This method of financing allows you to free up the cash that is sitting in your A/R ledger. And you don't have to have perfect credit or a huge cash reserve to use it. 

Invoices in the staffing world are often paid 30 to 90 days after the work is completed. This delay is usually what causes cash shortages in the first place. Factoring removes this delay and allows you to get the money within a day or two, instead of one to three months later. 

The first step is to put in an application with the factoring company. The factor wants to know that the clients you have are creditworthy. They will also need to verify that you generate enough invoice value to make factoring a viable option. If your invoice value is too low, the fees will make factoring financially unfeasible. This entire process normally takes three to five days. 

Once the application is approved, you can begin to submit your invoices for factoring. You can usually get your cash advance within 48 hours of submitting the invoice batch. That way, you can send out your employment tax payment on time, every time.

What If Your Company Has an IRS Lien?

When the IRS places a lien on your business, all of its assets are covered by that lien. Under normal circumstances, a business cannot factor their invoices if there is an IRS lien in place. However, in certain circumstances, factoring can be a tool to pay back the IRS and get back on track. 

In order for a company to start factoring, they must get the IRS to agree to subordinate its lien. That means the IRS agrees to allow the factor's lien on the invoices to be primary and the IRS' lien to be secondary. The IRS will often agree to this type of arrangement if the proceeds of the factoring are used to pay the back taxes. 

Factoring is a way to get your company back on track with the IRS and to stay up to date on your employment taxes in the future. Would factoring help your business? 

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