Every business owner who employs workers is familiar with payroll taxes. As a business owner, it’s your responsibility to withhold federal income and payroll taxes from wage earners and pay them to the IRS. The “trust fund” money is owed to the government by your employees, and the government considers it theft if they are not paid since the money was never yours to begin with. Surprisingly, hundreds of businesses are closed every year for withholding the taxes but failing to pay them over to the IRS. In this situation, the IRS doesn’t mess around – they will take immediate action if payroll taxes aren’t paid timely. Rather than risk further non-payment, they will reach into your bank account and take your money. If you do not have the cash in your bank account, they will shut down your business and liquidate business and personal assets to cover the unpaid payroll taxes. You can even be charged with a Federal Crime if the IRS proves you willfully did not file or pay.
Not the business owner? You are not off the hook if you have check signing authority and could have paid the IRS. If you are considered to be a “responsible person” for payroll taxes, and the definition is fairly vague, you can be personally assessed with 100% trust fund recovery penalty. In fact, everyone considered to be a responsible person can be billed for 100 percent. You can be deemed responsible even if you had no knowledge that the IRS was not being paid! We’ve even represented clients who served in voluntary positions for non-profit organizations who were being chased the IRS because they were named as responsible parties!
So, what is a “responsible” person? In this situation there is a legal test that applies. Although the definition is quite broad, there are a few facts to consider:
- Does the person have the power to spend and not spend company funds?
- Is the person listed on the company’s bank signature card?
- Did the person actually sign company checks during the time frame at issue?
- Can the person make decisions about which creditors to pay?
- Is the person named as an Officer or Director of the company,
- Does the person have control over the company’s payroll?
- Does the person signs tax returns?
- Does the person participate in day to day management of the company?
- Does the person hire or fire employees?
The fines for not paying payroll taxes can add up quickly! The IRS charges a failure to deposit penalty, a failure to pay penalty, and a failure to file penalty. The amount of the penalty is based on the number of days that the payment is late. For 1 to 5 days, the penalty is 2% of the total tax due; for payments 16 or more days late, the penalty is 10% of the total tax due. You can also be penalized 10% if you incorrectly pay your deposit, for example, paying your payroll deposit with your tax return.
Business owners who are running short on cash can be tempted to dip into the payroll tax fund to move money around for use as working capital. In the IRS world, this is called “pyramiding” and is considered to be a form of tax evasion. Businesses involved in “pyramiding” often end-up filing bankruptcy to dismiss the liability. But, this doesn’t help the responsible person(s) because they are still personally liable for paying the trust fund portion of the payroll taxes – and these are not dischargeable in personal bankruptcy!
Business owners who are suffering with payroll tax issues should seek immediate help from a qualified tax professional to minimize their personal exposure to the company’s tax bills!! There are options and it is better to attack the problem early instead of waiting for it to spiral out of control!