Payroll tax is an umbrella term that refers to Social Security, Medicare, unemployment, and other government programs. With the exception of unemployment, employers and employees equally pay into these programs. Employers are solely responsible for paying into unemployment.

When employers fail to pay these taxes, the IRS may assess them under the Trust Fund Recovery Penalty (TFRP). The IRS may assess the TFRP against anyone who is responsible for collecting and paying these taxes and willfully fails to pay them.

Business owners are generally considered to be responsible parties. When determining if someone is a responsible person, the IRS considers a variety of factors, including the level of control and power the individual has over the company. In the majority of cases, business owners will fall under the category of responsible parties.

Willfully means that someone voluntarily, knowingly, and intentionally failed to submit payroll taxes to the IRS. The IRS uses an example of someone who uses payroll taxes to pay off another debt as an example of willful behavior.

If the IRS finds that a business owner collected these taxes but willfully failed to pay them, the agency can go after the business owner's assets. This includes personal assets, such as bank accounts, secondary properties (the IRS rarely seizes primary residences), personal effects not deemed necessary, and household goods worth more than a certain combined amount.

For example, Paul is a business owner who used payroll taxes to fund an expansion to his business. The expansion failed, and Paul's business is cash and asset-poor when the IRS pursues him for the unpaid payroll taxes.

Paul is a sneakerhead with a collection of rare and coveted sneakers worth over $100,000. While the IRS leaves the shoes Paul wears, the agency seizes the sneaker collection to satisfy the unpaid payroll taxes.

Third Party Liability

If a business owner uses a third party or outside company to handle payroll taxes and other issues, whether the business owner remains personally liable depends on the facts of the case. A business owner may still be solely liable, or they may share liability with the third party.

If the business owner has an in-house accountant, the third-party issue isn't relevant. As the employer, the business owner will still be solely liable and potentially personally liable.

If you have questions about payroll taxes, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.