As a business owner and employer, you should take your payroll tax responsibilities very seriously. Failure to pay payroll taxes can lead to severe consequences, swiftly destroying your business, your personal assets, and even your freedom.
As an employer, you are required to withhold income taxes and FICA taxes (Social Security and Medicare) from your employees’ paychecks and hold the funds in trust until you turn it over to the IRS according to your deposit schedule. Be aware that even if you delegate someone to handle your payroll tax duties, such as a bookkeeper or payroll service provider, the IRS will still hold you responsible for any errors they make. You should always double-check their work. It is ultimately considered your responsibility to ensure these taxes are being duly collected and remitted to the government.
If your business fails to remit payroll taxes, the IRS can come after you as an individual, holding you personally liable for the trust fund recovery penalty. This 100% penalty more than doubles the original amount owed when combined with the filing penalties, payment penalties and interest charges. The trust fund recovery penalty is not dischargeable, even in bankruptcy. The immense repercussions for neglecting your payroll taxes can quickly generate huge tax debts and wipe out your business.
Why is the IRS so brutal about payroll taxes? Think about it like this: You are taking money out of your employee’s compensation and keeping it in your bank account. If you do not remit this money to the government, you are stealing it from both your employees and from the taxing authorities. If there is one creditor you should pay first, it is the payroll division of the IRS. If you neglect payroll taxes and pay other bills instead, you are using payroll tax money to cover operating expenses. Since this money does not belong to your business in the first place, you can be found guilty of willful tax fraud and sentenced to prison.
Though it is best to avoid these penalties altogether and make sure you are collecting and remitting your payroll taxes in a timely fashion, a tax professional can help you resolve payroll tax issues through an appeal with the IRS, penalty abatement for reasonable cause, or other viable payment plan options.