My business is behind on payroll taxes. Am I personally at risk?
Possibly. Taxes withheld from employees' pay are held in trust for the government, and the law can make the people responsible for paying them over personally liable when they are not. These cases move on their own timeline, and early representation matters.
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Money held in trust.
Payroll taxes are not ordinary business debts. The withheld portion was never the business's money.
Withheld taxes are a trust fund
Tax an employer withholds from someone else and must pay over to the United States is held as a special fund in trust for the United States.
Law · IRC §7501(a)What counts
The trust fund taxes are the income tax withheld from employees and the employees' share of Social Security and Medicare taxes. The employer's own share is not part of the trust fund penalty.
IRS practice · IRS Trust Fund Recovery Penalty guidanceDeposit penalties
Late deposits carry a penalty of 2, 5 or 10 percent depending on how late they are, and 15 percent if still undeposited 10 days after the first delinquency notice or on demand for immediate payment, unless due to reasonable cause.
Law · IRC §6656A higher bar for reasonable cause
Circumstances that might excuse late payment of income tax may not excuse failure to pay over taxes withheld from others.
Law · Treas. Reg. §301.6651-1(c)(2)The Trust Fund Recovery Penalty.
A person required to collect, account for and pay over the tax who willfully fails to do so is liable for a penalty equal to the unpaid trust fund amount.
Who can be responsible
A person with the duty and the power to direct the collection and payment of the taxes. That can include officers, partners, certain shareholders and directors, employees and payroll service providers.
Law · IRC §6672(a) · Scope: IRS practiceWhat “willful” means
Willfulness does not require bad intent. The IRS treats a person as willful who knew, or should have known, of the unpaid taxes and intentionally disregarded the law or was plainly indifferent to it, for example by paying other creditors instead.
IRS practice · IRS Trust Fund Recovery Penalty guidanceNotice before assessment
The IRS must notify you in writing at least 60 days before it demands payment of the penalty, and that notice extends the time to assess it. The IRS gives 60 days (75 if addressed outside the United States) to appeal the proposed penalty.
Law · IRC §6672(b) · Appeal period: IRS practiceMore than one responsible person
The IRS can assert the penalty against several people for the same taxes. A person who pays more than their share can seek contribution from the others in a separate proceeding.
Law · IRC §6672(d)Stop the growth first.
A payroll case cannot be resolved while new quarters keep going unpaid. The first priority is current deposits; then the past quarters, the business's balance and any proposed personal penalty can be addressed together, with the 60-day window protected.Bridge's view · practitioner judgment
We take it from here.
- We take controlOnce you sign the authorization, we deal with the IRS for you. Send us any IRS letter you receive.
- Exactly where you standEvery quarter, return, deposit and penalty, taken from the business's IRS record.
- Your deadlines, risks and leverageIncluding any proposed personal penalty and its appeal window.
- Your Resolution RoadmapIn writing: where the business and its people stand, and the paths open to both.
Primary sources: Internal Revenue Code §7501, §6672 and §6656; Treasury Regulation §301.6651-1(c)(2); IRS, Employment taxes and the Trust Fund Recovery Penalty. General information, not advice for your situation.