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Employment Tax Liability

06.24.11

Most business owners know that the employer is liable for paying portions income, Medicare, and social security taxes (also commonly called FICA or employment taxes) on behalf of employees. However, when economic times are tough, some business owners view employment taxes as an apparently cheap, easy place to “borrow” money and choose not to pay the employer's share of employment taxes. There are two typical methods employers use to “borrow” money from the government. The first is pay employment taxes late. The second is to not pay them at all. While the employer may consider this a cheap and easy way to borrow money, the IRS does not.

Late Filing Penalties
Employers may begin to pay employment taxes late – using the unpaid employment taxes as a way to float other payments until money comes in to pay the employment taxes. A primary concern with not paying employment taxes in order to pay other bills, is that the rate of “borrowing” is steep. IRS Publication 15 fully describes the penalties for late payment of employment taxes, but here is a summary:

  • For amounts not properly or timely deposited 1 to 5 days, there is a 2% penalty, for deposits made 6 to 15 days late, there is a 5% penalty, and for deposits made 16 days or more late, there is a 10% penalty added to the amount of employment tax due. If you wait to pay employment taxes until the IRS sends you a notice and demand for immediate payment of the taxes, and amounts are still unpaid 10 days after the date of this letter, then a 15% penalty is applicable.
  • These penalties are in addition to the interest rate which the IRS will charge on both the employment taxes owed and accumulating penalties.

Trust Fund Recovery Penalties
In addition to holding a company responsible for late filing penalties, the IRS can also seek to hold the person responsible for collecting or paying withheld income and employment taxes personally liable for the employment taxes if that person willfully fails to collect and pay them. Many business owners understand that a range of liability protections exists when operation as a corporation, partnership, or limited liability company. However, a business fails to pay employment taxes over to the IRS, the IRS may seek to hold the person responsible for these penalties individually liable. This is known as “responsible person” liability. Under responsible person liability, each person that is deemed responsible and willful will be held liable for the unpaid employment taxes. As an example, if both the President of a company and its accounts payable director are determined to be responsible parties, then the IRS can seek to recover the full amount owed from each of them. However, the IRS will not be allowed to recover more than the full amount owed.

Who is a responsible person?
That depends – the courts look at several factors to determine if someone is a responsible person. The court may look to see if a person has the authority to sign checks, if a person's responsibility includes payment of employment taxes, if a person is an employee of the business, if the employee has an ownership interest in the business, and if the person has signed checks. None of these factors individually determine whether someone is a responsible person, but all of them and more may be considered.

What is willful?
A “voluntary, conscious, and intentional” act is considered willful. Todd v. U.S., (S.D.Ga. 2009). If you intentionally do not pay employment taxes, then that would be considered willful. Furthermore, the “willfulness requirement of § 6672 is satisfied if the responsible person has knowledge of payments to other creditors after he becomes aware of the failure to remit the withheld taxes.” Bonaventura v. U.S. (N.D.Ga. 2009). As an example, if a responsible person pays the electric bill after he is aware of the outstanding employment taxes, then he might be considered willful and held responsible for the business's employment taxes.