Beware Personal Liability For Payroll Taxes.

Even if you’re not the owner of the company, if you’re the person “Responsible” for paying Payroll Taxes, the IRS will hold you accountable along with the owners.

Employers of all sizes know failing to pay wages to employees is nothing to joke about.  Especially in these tough economic times, wage obligations must be taken seriously.  Company officers can even face personal liability.  For example, in Boucher v. Shaw, the Ninth Circuit Court of Appeals held employees of a bankrupt company could pursue claims against three managers for unpaid Payroll Taxes.  Despite the company’s bankruptcy, the plaintiffs were able to sue the CEO, CFO and labor relations manager personally for unpaid wages.

Maybe this is unusual, but you know what is not?  Managers facing personal liability for Payroll Taxes the company withholds from payroll checks but fails to pay to the IRS the Payroll Taxes.  Businesses must withhold income tax and Social Security tax from paychecks and should send the money right away to the IRS.  But if the business is failing, is it OK to pay the rent, vendors and utility bills to keep the lights on?  Hey, that’s more important than the IRS, right?  Besides, the IRS will get its money later before they figure it out. . . .

Payroll Taxes Trust Fund Taxes

Needless to say, this is very dangerous, yet thousands of businesses fall into this trap every year.  These Payroll Taxes are “trust fund” taxes.  “Trust fund” ought to sound pleasing to the ear, as in “trust fund babies.”  But here it has a decidedly negative ring.  When trust fund taxes don’t show up, the IRS will pursue the business to collect.  The IRS can even padlock the business to stop the bleeding.

Personal Liability for Payroll Taxes for Responsible Persons.  Plus, personal liability for the owners and managers is a potent IRS weapon.  The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against each and every “responsible person.”  Typically, the IRS continues trying to collect from the company and to collect the 100-percent penalty from every officer.  If there are six officers, that can mean the IRS is simultaneously trying to collect the tax plus 600 percent from individuals!

The IRS can collect only once and there can sometimes be scrambles not unlike a rugby scrum.  Some responsible persons try to sic the IRS on other more solvent or more visible responsible persons.  That can be a clever strategy for executives caught within the “responsible person” net.  Try to show you were not responsible (tough) and that other more culpable (or wealthier and more liquid) officers are waiting in the wings. It can be a Machiavellian business.

I’m Not Responsible!  Trying to show you weren’t responsible is usually a losing battle.  You might consciously pay someone else ahead of the IRS to keep the business afloat, or you might have no actual knowledge the IRS is not being paid.  Either way, if you had signature authority and could have paid the IRS, you’re responsible.  The IRS position is that every officer is responsible for Payroll Taxes and that some non-officers with signature authority are too.

Some bookkeepers in this precarious situation demand written assurances from their company every week that payroll taxes are being sent in.  Some people also resign from their jobs over this issue.  It’s not an overreaction.  If you’ve ever been in one of these disputes, you won’t want to be in another.  In a tough economy, it’s even more important to be vigilant.