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Using an Escrow Account to Pay Business Taxes

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This financial tool can help your company stay organized throughout the year

Escrow accounts can be used by businesses to hold money owed to the government for taxes before that money is actually paid to the taxing authority. They are most commonly used when withholding employee payroll taxes, which include income taxes, FICA (Social Security and Medicare) taxes and the employer's share of FICA tax.

By law, taxes must be withheld by employers from employees' gross pay and then remitted by the business to the state and federal governments along with the employer's share of the FICA tax. During the time between when the taxes are withheld from employees' wages and the time when they are actually paid to the government, employers may deposit the money in an escrow account.

An escrow account can be established at the financial institution where the company already has business accounts as well as at many other financial institutions and payroll companies.

The employer's share and the taxes withheld from the employee must be sent to the IRS electronically using the Electronic Federal Tax Payment System (EFTPS) according to one of the following schedules:

Chris Wilcox, CPA, of Johnson Jacobson Wilcox in Las Vegas, Nevada,notes that an escrow account can be an effective tool for segregating money owed to the government from money needed to meet the ongoing obligations of your business. "By placing the payroll tax deposit money into an escrow account, you are placing it 'out of sight, out of mind,'" says Wilcox.

During difficult financial times, small companies that are only required to make monthly payroll tax deposits often view Uncle Sam's money as a safety account to get them through a cash crunch, Wilcox explains: "Much too frequently, however, the money is not there when the taxes are due. Segregating the funds by using an escrow account helps develop the discipline of not borrowing money from Uncle Sam."

In addition to using an escrow account to deposit and remit payroll taxes, you can also use such an account to deposit and remit your quarterly estimated taxes. This can be a good way to make sure you are setting aside enough money each month to pay your business income taxes (both state and federal) when they are due.

Generally speaking, the process is easy. Simply establish an escrow account and start regularly depositing enough money to cover one month of business income taxes. At the end of the quarter, remit the escrowed money to state and federal taxing authorities for the amounts due. Escrow accounts can help both large and small businesses stay organized as they continue to grow and profit. Talk to us today about establishing an escrow account for your business.

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