As small businesses struggle with cash needs and try to operate with insufficient working capital and cash balances, they often find themselves unable to meet all of their cash requirements. Too often they choose the undesirable option of not making payroll tax deposits or not paying state sales tax. This is the worst thing that can be done in the face of inadequate cash balances.

First, both the federal and state tax authorities will assess penalties and interest for not paying taxes. For federal payroll tax deposits, the penalty on late deposits is 10 percent of the undeposited tax. That is not calculated as an annual interest rate, but is a flat 10 percent of the unpaid tax for each tax deposit that is late!

Second, both the state and federal tax authorities have the authority to file a tax lien against your business and against you personally if necessary. A tax lien is a public document that will inhibit your ability to obtain credit and will show on your credit report.

Third, the federal tax code authorizes the IRS to assess you personally a penalty equivalent to 100 percent of the unpaid payroll tax if your business is unable to pay the tax.

Finally, the IRS has the authority, and will use it if necessary, to levy your bank account -- business or personal -- to collect the debt. The state will send a warrant to the sheriff's department, who will "come to see you and collect."

When money gets tight it is often tempting to skip paying a tax until "things get better."Simple advice: Pay federal and state taxes when due. You cannot afford the penalties and you do not want the grief they can cause you and your business.