Payroll Tax Debts and Personal Liability

I recently did a blog post on the importance of making estimated quarterly tax payments if you’re self-employed.  I’d like to take this a step further for those of you who are not only self-employed but you also have employees.  (And if you ARE an employee, you’re going to want to make sure that your employer is doing this!)

The focus of my practice in Severn, MD is to help taxpayers get in compliance with their IRS and state tax filings and to represent them before the IRS and the states with their tax collection issues.  I work with individuals as well as business owners, and a lot of my business owner clients have employees.

Remember those income and employment taxes that I mentioned being withheld from your paychecks if you’re an employee in my last blog?  Did you ever think about what happens to that money once it’s subtracted from your gross pay?

This is a very simplified explanation of Federal tax withholdings but basically:

  • The Income Tax portion is calculated based on the Form W-4 that was completed by the employee. This amount is funded strictly from the employee’s gross pay, and money is withheld from the employee’s paycheck to cover the entire amount due for income taxes.
  • The Employment (FICA) Tax portion is funded by both the employee and the employer with the employee’s half being held back from their paycheck.
  • The money withheld from the employee’s paycheck to cover their income tax as well as their share of the FICA taxes due for the payroll period is called “withholdings”. A net payroll check is issued to the employee after subtracting these withholdings from their gross pay for that payroll period.
  • The withholdings are kept in the employer’s bank account until they’re remitted to the Treasury on a monthly or semi-weekly basis depending upon the amount due. Sending these payments to the Treasury for taxes withheld from employees along with the employer’s own portion of FICA taxes is called making your Federal Tax Deposits.

There are other taxes that must be remitted by the employer (such as for Federal and state unemployment) and other amounts that are subtracted from an employee’s paycheck (such as for health insurance), but these withholding taxes are in a category all their own.  They’re also called “trust fund taxes” since they’re supposed to be held in trust by the employer until paid over to the Treasury.  Employees TRUST that their employer is paying the amounts withheld from their paychecks to the Treasury by making their required Federal Tax Deposits and by making them timely.

Unfortunately, what SHOULD happen with those funds isn’t always what happens in reality.  One of the more scary situations that I’ve seen is where an employer doesn’t have the cash available to make these monthly or semi-weekly payments.  The pattern that most often plays out is seen in the following downward spiral:

  • The employer can’t make payroll AND make their Federal Tax Deposit one month. For whatever reason, there just isn’t enough cash in the bank to both give the employees the net paycheck they’re expecting  AND send the income and FICA taxes withheld from the employees over to the Treasury
  • The employer chooses to only pay the employees that month (since they need to keep their workers) and rationalizes that “no one will know”
  • Thinking that “next month will be better”, the employer fails to make the Federal Tax Deposit
  • Next month comes…and it isn’t any better
  • The months add up, and the employer now has an overwhelmingly large amount due
  • IRS comes knocking (because they actually DO see when Federal Tax Deposits aren’t being made)
  • The employer is unable to hide the terrible fact any longer. The employees are sent home, and the business closes.

Borrowing from your payroll taxes by not making your Federal Tax Deposits is said to be “the easiest loan to take but the hardest to pay back”.  Not only is the business liable for these unpaid trust fund taxes but the business owner is personally liable, as well.  Congress saw this issue as such a problem that it enacted the Trust Fund Recovery Penalty to encourage prompt payment of withheld or other collected taxes by allowing the IRS to assert liability against willful and responsible third parties (such as the administrative staff person who’s writing the payroll checks).

Just like with your income taxes due, however, the IRS is more than willing to work with employers on settling the amounts due for withholding taxes and for trust fund recovery penalties.

My goal is to help taxpayers meet their tax filing obligations, to pay the least amount of tax legally possible, and to represent them when they have an IRS or state collection issue.  I have clients not only in Severn, MD and Anne Arundel County, MD but all over the world since technology has made our world much smaller and our ability to work remotely much easier.  Come see me or just give me a call or send me an e-mail if you’re an employer who’s not been able to pay your withholding taxes and who needs help with getting compliant.  You can reach me at:

Lisa D Church, CPA, EA, NTPI Fellow, MBA

7865 Clark Station Rd
Severn, MD 21144