Evergreen Tax Law

Payroll Taxes and the Trust Fund Recovery Penalty

         

    Payroll Taxes are comprised of the following:

​​

• ​Federal Income Tax that is withheld from employee paychecks;

 

• FICA Taxes (Social Security/Medicare Taxes) withheld from employee paychecks PLUS the Employer’s matching amount;

 

• Federal Unemployment Taxes, which are based on Total Gross Payroll.

 

    When employers withhold taxes from their employee paychecks, they are taking money that would otherwise go to the employees in order to pay the taxes the employees would owe. In other words, this money does not belong to the employer; it is held “in trust” by the employer, for the employee, until it is paid over to the IRS. (How to tell who is an Employee and who is an Independent Contractor).

               

    Failure to pay this withheld money over to the IRS can result in what is known as the Trust Fund Recovery Penalty. Payroll tax issues can be extremely costly to a business, as the penalties and interest tend to add up very quickly. Ignoring payroll tax issues could quickly cause a business to go under.

 

    Furthermore, in order to collect this money, the IRS can and will hold individual people personally responsible for the entire amount outstanding. This is why the penalty has also been called the “100% Penalty.”

​

 

Who can be held personally responsible for Payroll Taxes?

               

    The IRS takes payroll tax issues very seriously. Because the employees themselves cannot be held responsible for the missing taxes, the IRS knows it will lose revenue if it does not get the money from the business itself or a “Responsible Person.”

 

    A “Responsible Person” is someone who has the duty to perform or the power to direct the act of collecting, accounting for, or paying over trust fund taxes.

 

     The following is a list of people and entities that may be labeled a “Responsible Person” by the IRS:

​​

• An officer or an employee of a corporation,

 

• A member or employee of a partnership,

 

• A corporate director or shareholder,

 

• A member of a board of trustees of a nonprofit organization,

​​

• Another person with authority and control over funds to direct their disbursement,

​​

• Another corporation or third party payer,

 

• Payroll Service Providers (PSP) or responsible parties within a PSP,

 

• Professional Employer Organizations (PEO) or responsible parties within a PEO, or

 

• Responsible parties within the common law employer (client of PSP/PEO).

​

 

    The IRS tends to cast a wide net when it is seeking to hold someone personally responsible for missing payroll taxes. The IRS could choose to come after any number or combination of the above list of “Responsible People,” leaving each person in the position to personally explain why they should NOT be held responsible.

 

​

The Willfulness Requirement

​

    The IRS also requires that a “Responsible Person” exhibit “Willfulness” in their failure to pay the taxes before they can hold someone personally responsible. In order to find that a “Responsible Person” exhibited “Willfulness,” the IRS will seek to prove that the person:

​​

• Must have been, or should have been, aware of the outstanding taxes; AND

​

• Either intentionally disregarded the law or was plainly indifferent to its requirements.

 

    Quite often, when short on money, a business will make a decision to pay a supplier or some of its bills with money that should have gone to the IRS. However, using available funds to pay other creditors when the business is unable to pay the employment taxes is considered an indication of “Willfulness” by the IRS.

 

 

What will the IRS do to collect the taxes? 

​

    Once the IRS has determined who they consider to be responsible for the missing payroll taxes, they will go after those people directly, as well as the business itself, in an effort to recover the taxes.

 

    If the IRS were to determine that five different people were responsible for the missing taxes, the IRS would treat each of those people as responsible for 100% of the amount owed, and proceed to collect as much as possible, up to the amount owed in total, from each person.

 

    For example, if the business owed $100,000 in missing payroll taxes, the IRS would seek to recover that $100,000 in any combination possible; whether that means taking $100,000 from just one of the five people, or taking $70,000 from one, $15,000 from another, and $5,000 from each of the remaining three people. 

​

    To collect this money, the IRS would likely resort to placing liens and levies on the assets and bank accounts of both the business itself and those individuals it has chosen to go after.

 

    If you or your business are dealing with payroll tax issues, it is extremely important to act quickly and speak with a tax law professional in order to get ahead of the situation as soon as possible.