What are the Consequences of Unpaid Payroll Taxes?
Unpaid payroll taxes are a bigger deal than you may suspect. They can result in fines and sometimes, even jail time. Here’s how to deal with unpaid payroll taxes.
The IRS typically seeks to enforce unpaid payroll taxes much earlier and more aggressively than cases of unpaid personal income tax. The consequences of this type of liability can be quite swift and severe.
How Do You Get Into Payroll Tax Trouble In The First Place?
Payroll taxes (aka employment taxes) are comprised of three parts:
- The federal income tax which employers are required to withhold from their employees’ paychecks.
- The federal Social Security and Medicare taxes which employers are also required to withhold from employees’ paychecks.
- The matching part of federal Social Security and Medicare taxes that employers are required to contribute.
These are called trust fund taxes by the IRS. Why? Because, as the name suggests, the funds are held in a trust! The IRS typically regards falling behind on payroll taxes as a type of employer theft, because, in the opinion of the IRS, the funds never belonged to the business in the first place.
Willful Ignorance of the Law
Any person, according to the IRS, who willfully fails to withhold the proper amount of money from his or her employee’s paycheck will be liable to personally pay fines that can equal or exceed the total amount owed from the taxes.
Responsible Person Test
Both the IRS and the courts define what it means to be “responsible person” quite broadly. The most important thing is to determine who, with a particular company, has official, statutory responsibility to ensure that payroll taxes are being paid.
Several factors indicate responsibility, including whether the person
- Has the power to compel or prohibit the allocation of funds.
- Has the authority to sign checks.
- Has the authority to make decisions as to disbursement of funds and payment of creditors.
- Is an officer or director of the corporation.
- Has to control over the company’s payroll.
- Prepares and signs payroll tax returns.
- Actively participates in day-to-day management.
- Hires and fires employees.
Although this list is not comprehensive, the status, duty, and authority of an employee principally determine whether the person is responsible under Sec. 6672 for paying over withholding taxes to the United States. Individuals who are non-owner employees performing ministerial acts without exercising independent judgment will not be deemed responsible.
Company officers often either do not understand or do not want to be bothered with accounting or tax matters, and it’s not uncommon for payroll-tax-duty to be delegated to lower-level employees. If, however that employee fails for whatever reason to pay payroll taxes, it is often the officer/delegate who will be held legally responsible. So be careful and make sure whoever is responsible for payroll taxes in your company has some necessary oversight!
Do you need a tax attorney in Michigan? Then give us a call now at (248) 262-3400 for a free, no-obligation consultation with our talented tax law team.