Tax Litigation Law Office of Scott Kauffman
(949) 751-6456

Hackney Literary Award
Mighty River Short Story Contest Winner

Unpaid payroll taxes and personal liability

Withholding payroll taxes from employees' wages and paying it over to the IRS sounds so simple in theory. But the problems it can pose for employers can be very difficult in practice.

In Southern California and across the country, failure to make those payments to the government can get business people in tax trouble. It can sometimes get them in trouble even in cases where there were no ill intentions at all.

For example, as we discussed in our April 26 post, many small businesses turn the administrative task of handling their payroll taxes over to third-party firms. If those firms encounter financial difficulty or engage in fraud, it can come back to haunt the business that hired them.

In addition, there is the issue of the scope of personal liability for payroll taxes under federal law. The way the law is written, it isn't only business owners who may face liability for unpaid payroll taxes, which are also often called employment taxes.

Even employees who are not owners can potentially face personal liability if they have been designed as "responsible persons" for the withholding and payment of these taxes. This liability can include stiff IRS tax penalties. Under section 6672 of the Internal Revenue Code, the penalty for failure to withhold or pay over employment taxes is 100 percent.

For a small business employee who has check-signing authority, it might be difficult to decline an owner's request for designation as a "responsible employee" for payroll tax purposes. But the possibility of personal liability should give such employees pause.

Source: Forbes, "Can IRS Collect 30 Year Old Tax Tebt? You Bet," Robert W. Wood, June 5, 2013