Employment taxes are: The amount you should withhold from your employees for both income and social security tax, plus the amount of social security tax you pay on behalf of each employee.

When it comes to unpaid payroll taxes and unfiled payroll tax returns, the IRS can levy on the assets of the business, including the accounts receivable, equipment, vehicles, and bank accounts. The IRS can also close the business for non-payment of payroll taxes. If the business is closed or files for bankruptcy protection, the IRS will look to the owners, officers, and any other responsible person for collection of the penalties, interest, taxes and trust funds.

For many businesses, when they start to have financial problems one of the first things to happen is the payroll taxes are not paid on time and the payroll returns are not filed on time. Both of these are among the worst things to do when a business has fallen upon hard times. When a business fails to pay the payroll taxes on time, penalties and interest start to accrue. If the payroll returns are not filed on time the penalties are substantially increased. Failure to file a return on time can incur penalties of 5% per month to a maximum of 25%. Add that to other penalties, along with the compounded interest and you can have a very serious tax problem.

The Internal Revenue Code states that “any person required to collect…and pay over any tax imposed…shall…be liable to a penalty equal to the total amount of the tax…not collected.” This is commonly known as the 100% Trust Fund Penalty. The penalty is assessed for the Trust Funds not paid. Trust funds are the money the business withholds from an employee's paycheck, which includes federal income tax and the employees' share of FICA and Medicare.

According to the IRS, a responsible person is a person or group of people who have the duty to perform and the power to direct the collecting, accounting and paying of trust funds. This person may be: 

  • 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, or

  • any person with the authority and control to direct the disbursement of funds.

For willfulness to exist, the responsible person must:

  • Have known about the unpaid taxes, and

  • Have used the funds to keep the business going or allowed available funds to be paid to other creditors.

Willfulness includes intentional, deliberate, voluntary, reckless disregard, knowing or accidental, free will or choice. The issues presented in determining who the responsible person is and whether or not willfulness exists depends upon the facts and circumstances in each case. If the taxes are not paid, the IRS will be looking for someone to penalize. If the IRS is planning to assess the Trust Fund Recovery Penalty against you, it is imperative that you contact a tax professional.

To encourage corporate business owners to make prompt payment of their employees’ withheld income and employment taxes, including social security taxes or collected excise taxes, Congress passed a law that provides for the Trust Fund Recovery Penalty. (These taxes are called trust fund taxes because you the employer actually hold the employee’s money in trust until you make a federal tax deposit in that amount.) If the IRS plans to assess you for the trust fund recovery penalty, you will receive a letter stating that you are a responsible person. You have 30 days after the IRS sends the letter to appeal.   If you do not respond to the letter, the IRS will assess the penalty against you and send you a Notice and Demand for Payment.

Please note, the IRS can apply this penalty whether or not you are out of business.

If you do not pay your employment taxes on time the IRS will charge you interest and penalties on any unpaid balance. Contact a qualified Enrolled Agent.

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