It is serious. But you have options, and it helps to know exactly where you stand.
Payroll taxes are not like most business bills. Part of the money belongs to your employees. That is why the IRS can look past the business to the people responsible for paying it. IRS: Employment taxes and the Trust Fund Recovery Penalty.
This page explains what is owed, who can owe it, and what can help.
If you are not sure where you stand, book a free call. We read the IRS letters with you, one at a time. It does not commit you to anything.
What this page covers
This page is about federal payroll taxes, also called employment taxes. State payroll taxes have their own rules.
- If the IRS has added penalties, see Can IRS penalties really be removed?
- If the IRS has sent a final notice of intent to levy, or filed a lien, see The IRS is about to levy or file a lien. Can I appeal?
- If you want to see what the IRS has on file first, see How do I find out exactly what the IRS has on me?
What payroll taxes are
When you run payroll, you hold back some of each paycheck. IRS: Understanding employment taxes.
- Federal income tax withheld from the employee
- The employee’s share of Social Security tax
- The employee’s share of Medicare tax
These three are called trust fund taxes. You hold that money in trust for your employees until you pay it to the IRS. IRS: Trust fund taxes.
The business also owes its own matching share of Social Security and Medicare tax. IRS: Trust fund taxes. Federal unemployment tax, or FUTA, is separate again. The employer pays it from its own funds. It is not taken from the employee’s pay. IRS: Understanding employment taxes.
Employers report these taxes on returns such as Form 941, the quarterly return. Others include Form 940 for FUTA and Form 944. Deposits must be made by electronic funds transfer. IRS: Understanding employment taxes. They follow a monthly or semi-weekly schedule. IRS: Failure to Deposit Penalty.
For our clients, the first thing we do is pull the business’s IRS account transcripts. That shows which quarters the IRS says are unpaid, and what has been added to each one.
Can it reach me personally?
It can. Congress created a penalty for unpaid trust fund taxes. It is called the Trust Fund Recovery Penalty, or TFRP. IRS: Employment taxes and the TFRP.
The IRS can charge it to a person, not just the business. The TFRP may apply if the unpaid trust fund taxes cannot be collected from the business right away. The business does not have to have closed. IRS: Employment taxes and the TFRP.
Who the IRS can charge
The IRS can charge any person who meets both of these tests. IRS: Employment taxes and the TFRP.
- The person was responsible for collecting or paying the withheld taxes
- And the person willfully failed to collect or pay them
Both must be true. The law says the same thing in its own words. 26 U.S. Code § 6672.
What “responsible” means
A responsible person has the duty to do this work. They also have the power to direct how the money is collected, tracked and paid. It can be one person or a group. IRS: Employment taxes and the TFRP.
The IRS says that can include these people. IRS: Employment taxes and the TFRP.
- An officer or employee of a corporation
- A member or employee of a partnership
- A corporate director or shareholder
- A member of a nonprofit’s board of trustees
- Anyone else with authority and control over the money
- A payroll service provider, or a professional employer organization, or people inside one
The question is whether the person used their own judgment about the business’s money. An employee who only paid bills as a boss told them to is not a responsible person. The key question is whether they had a say in which creditors got paid. IRS: Employment taxes and the TFRP.
There is one narrow exception in the law. It is for unpaid, volunteer board members of tax-exempt groups. It only applies when all of these are true. 26 U.S. Code § 6672.
- They serve only in an honorary role
- They do not take part in day-to-day or money matters
- They did not actually know about the failure
It also does not apply if it would leave no one liable. 26 U.S. Code § 6672.
If you think the IRS may look at you, book a free call. For a client who hires us, we take over contact with the IRS, with their authorization.
What “willful” means
Willful does not need a bad motive. The IRS looks at two things. IRS: Employment taxes and the TFRP.
- The person knew, or should have known, the taxes were unpaid
- And the person either ignored the law on purpose or was plainly indifferent to it
The IRS also says this. Using available money to pay other creditors, when the business cannot pay its employment taxes, is a sign of willfulness. IRS: Employment taxes and the TFRP.
For our clients, we look early at who the IRS may treat as responsible. If it looks like it could be you, we would rather tell you that on day one.
How much is the penalty?
The penalty equals the unpaid trust fund taxes. It is figured from two parts. IRS: Employment taxes and the TFRP.
- The income tax withheld from employees and not paid
- Plus the employees’ share of Social Security and Medicare tax
So the business’s own matching share is not part of this penalty. The IRS also charges interest on the penalty. IRS Notice 784.
If more than one person pays the penalty for the same tax, the law lets someone who paid more than their share recover the extra from the others. That claim has to be brought in its own separate case. 26 U.S. Code § 6672.
How the IRS decides
The interview
You may be asked to do an interview. It helps the IRS work out what your duties and powers were. IRS: Employment taxes and the TFRP.
Book a free call before the interview if you can. If you hire us, we get ready for it with you, and with your authorization we represent you in it.
The letter
If the IRS decides you are a responsible person, it sends a letter. The letter says it plans to charge you the TFRP. IRS: Employment taxes and the TFRP.
- You have 60 days from the date of the letter to appeal
- It is 75 days if the letter is addressed to you outside the United States
- The letter explains your appeal rights
IRS: Employment taxes and the TFRP. The IRS points to Publication 5 for how to appeal. IRS: Employment taxes and the TFRP.
By law, this notice must come at least 60 days before the IRS demands payment of the penalty. That rule does not apply if the IRS finds collection is in jeopardy. 26 U.S. Code § 6672.
For our clients, we find the date on that letter first. Then we prepare the appeal and represent them before the IRS Independent Office of Appeals.
If you do not respond
If you do not respond, the IRS charges the penalty. It sends you a Notice and Demand for Payment. IRS: Employment taxes and the TFRP.
After that, the IRS can collect from your personal assets. For example, it can file a federal tax lien, or take levy or seizure action. IRS: Employment taxes and the TFRP. The IRS says exempt assets are not included. IRS Notice 784.
If the 60 days are running now, book a free call. We go through the letter with you and what an appeal would need.
Penalties on the business
The business can also owe a penalty for late deposits. It is called the Failure to Deposit Penalty. It applies when deposits are not made on time, in the right amount, or in the right way. IRS: Failure to Deposit Penalty.
The penalty is a percent of the deposit that was not made correctly. It depends on how late it was. IRS: Failure to Deposit Penalty.
- 1 to 5 calendar days late: 2%
- 6 to 15 calendar days late: 5%
- More than 15 calendar days late: 10%
- More than 10 calendar days after the first IRS notice or letter, or the day you get a notice asking for immediate payment: 15%
These do not add up. A deposit 20 days late is charged 10%, not 2% plus 5% plus 10%. The IRS also charges interest on penalties. IRS: Failure to Deposit Penalty.
Our clients give us the notices they have. We match each penalty to its quarter, and check it against the IRS transcript.
Can those penalties come off?
Sometimes. The IRS may remove or reduce some penalties if you acted in good faith. You also need to show reasonable cause for why you could not meet the rules. IRS: Failure to Deposit Penalty.
Interest is different. By law, the IRS cannot remove interest unless the penalty itself is removed or reduced. IRS: Failure to Deposit Penalty.
If something got in the way of a deposit, book a free call. We go through what happened with you, and whether a relief request fits.
What if we used a payroll company?
Many employers pay a payroll company to file and deposit for them. If that company fails to pay, the employer is still responsible for the deposits and the returns. IRS Notice 784.
Depending on the facts, the employer may stay solely liable. Or the employer and the third party may both be liable. IRS Notice 784.
For our clients, we line up what the payroll company says it paid against what the IRS shows. That is where any gaps show up.
What can help
Stay current from here
The IRS says the way to avoid the TFRP is to collect, track and pay all employment taxes when they are due. IRS: Employment taxes and the TFRP. That keeps new quarters from adding to the problem. It does not undo the TFRP risk on quarters that are already unpaid.
Staying current also matters for a payment plan. To get a Simple Payment Plan, you must be current with all filing and payment requirements. IRS: Simple Payment Plans.
Book a free call if the next deposit is the worry. We line up the business numbers with you against what a plan would need.
Payment plans for a business
A business can ask the IRS for a payment plan. Business taxpayers apply by calling the number on the notice, or 800-829-4933. They can also visit a local Taxpayer Assistance Center. A sole proprietor applies as an individual. IRS: Payment plans; installment agreements.
The IRS now offers Simple Payment Plans to businesses. They do not need a financial statement or a lien decision. The IRS also does not have to decide on the TFRP before granting one. To qualify, a business generally must be current with all filing and payment. It must also owe no more than these amounts in assessed taxes, penalties and interest. IRS: Simple Payment Plans.
- $25,000 or less, for a business with trust fund taxes
- $50,000 or less, for a sole proprietorship with trust fund taxes that is out of business
- $50,000 or less, for a business without trust fund taxes
If you do not qualify, another type of payment plan may still be possible. IRS: Simple Payment Plans.
While a payment plan request is pending, the IRS is generally not allowed to levy. There are some exceptions. IRS: Payment plans; installment agreements. Interest and some penalties keep adding up until the balance is paid. IRS: Payment plans; installment agreements.
For our clients, we build a plan aimed at keeping the business running where that is possible. With their authorization, we deal with the IRS for them while we do it.
Who works your file
On our team, Abby Fernandez, JD, is an attorney admitted to the Ohio Bar and the U.S. Tax Court. Betsy Miller is an Enrolled Agent. The same small team stays on the case from the first call to the last.
What to gather
- Every IRS notice or letter, in date order
- Your Forms 941, or the other payroll returns you file
- Your bank records showing tax deposits
- Any reports from your payroll company
- A list of who could sign checks and who decided which bills got paid
- The name and number of anyone at the IRS you have spoken to
Book a free call and bring what you have. For our clients, we track down whatever is missing.
Where this leaves you
Unpaid payroll taxes are serious. Part of the money is held for your employees, so the IRS can charge a penalty to the people responsible for paying it. It can only be charged to someone who was both responsible and willful. In most cases you get a letter first, and 60 days to appeal it. Penalties on the business may come off if you acted in good faith and can show reasonable cause. A business that is current on its filings and deposits, and owes under the IRS limits, may qualify for a Simple Payment Plan.
If you want a second pair of eyes on your notices, IRS Help offers a free 30-minute consultation. There is no pressure, and we read your IRS records before anyone commits to anything. You can reach us through the contact page.
This article is general information about federal payroll taxes. It is not legal or tax advice about your situation. What applies to you depends on your notices, your business and your role in it.
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