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Problems with payroll taxes could lead to personal liability

If a company has employees, then the employer must pay certain taxes to the IRS on behalf of each employee. If you are the person within the company responsible for paying these amounts, then you probably fit into the IRS' definition of a "responsible party."

In this role, you face personal liability if payroll taxes are not paid and properly reported. Even if all you do is remain in contact with an outside company who handles your company's payroll taxes, the IRS still holds you responsible if that company fails to make your payments or fails to make the correct payments, so it's important to keep informed.

What types of penalties could you face?

As is the case with most things having to do with the IRS, the penalties you could face for non-payment of payroll taxes are complicated. In particular, you could face the Trust Fund Recovery Penalty, which the IRS imposes if it believes your company willfully failed to account for and pay tax, collect tax, or otherwise attempted to defeat the tax or evade paying it. Below are a few of the more common penalties:

  • You could owe 100% of the unpaid taxes under the TFRP, which involves the taxes your company must hold in trust to cover payroll taxes until payments occur. You will also end up responsible for the interest that begins accruing from the missed due date.
  • If you fail to file Form 941 or other applicable forms, you will owe anywhere from 2% to a maximum of 15% of the monies owed. The percentage depends on how many days late the forms are and whether the company received a notice from the IRS regarding the late filing.
  • Penalties could arise due to failing to properly classify employees. For instance, if you misclassify an employee as an independent contractor and fail to collect payroll taxes, you could face penalties because of it.

Even if you convince the IRS that your company -- and you -- did not "willfully" fail to make the required payroll taxes and submit all of the proper forms, the agency may still assess penalties against you. The penalties can be quite costly and depend on a variety of factors.

If you are starting a company and will have employees, you would be wise to consult with a tax attorney regarding payroll taxes in order to avoid costly mistakes for which you could end up personally liable. If the IRS recently notified you of an error, you may want to discuss the situation with an attorney as soon as possible in order to minimize the penalties and interest.

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