Paying and Reporting Payroll Taxes

If your business has employees, it must withhold payroll taxes and deposit those funds with the IRS. Payroll taxes consist of federal and state income tax, and social security and medicare taxes. Employers are also responsible for matching social security and medicare taxes, and for paying federal and state unemployment taxes, and an additional medicare tax paid by employers. Employment taxes are reported quarterly on IRS Form 941.

Trust Fund Recovery Penalty

The IRS will aggressively seek to collect any payroll taxes a business fails to pay on time. When an employer withholds payroll taxes, it holds those amounts in trust for the government. To collect those trust fund taxes, the IRS may assess a Trust Fund Recovery Penalty against all responsible persons in an amount equal to 100% of the outstanding payroll taxes. You cannot discharge a Trust Fund Recovery Penalty through bankruptcy!

The IRS may assess a Trust Fund Recovery Penalty for the full amount of the unpaid payroll taxes against any person who is responsible for collecting or paying the taxes and willfully fails to collect or pay them.

A responsible person can include:

• An officer or an employee of a corporation
• A member, manager, or employee of a limited liability company or partnership
• A corporate director or shareholder
• A member of a board of trustees of a nonprofit organization
• A person with authority and control over funds to direct their disbursement, like a CFO, COO, or treasurer or anyone who signed or could have signed checks to pay creditors
• A Payroll Service Provider (PSP) or responsible person within the PSP
• A Professional Employer Organization (PEO) or responsible parties within a PEO

To establish willfulness the responsible person:

• Must have been, or should have been, aware of the outstanding tax; and
• Either intentionally disregarded the law or was plainly indifferent to its requirements.

The IRS does not have to show evil intent or a bad motive to hold a responsible person liable.

The IRS May Seek to Shut Your Business Down

If your business has shown a pattern of failing to pay payroll taxes or file quarterly IRS Form 941s, the IRS may try to shut your business down. From their perspective, a business that cannot remain current with its payroll tax and filing obligations should be closed to prevent the outstanding balance from increasing. After the IRS closes the business, they will assess a Trust Fund Recovery Penalty against all of the owners, officers, and managers and other responsible persons, and seek to collect the outstanding payroll tax liabilities from their personal assets.

Common Forms

• IRS Form 941
• IRS Form 940
• IRS Publication 15 (Circular E), Employer’s Tax Guide
• IRS Publication 15-A Employer’s Supplemental Tax Guide
• IRS Notice 784