Business payroll tax debt: when it becomes your personal problem
Business tax debt got a little simpler to pay. Personal liability didn't get any softer.
If your business is behind on payroll taxes, there are two problems: the company's debt, and the chance that part of it becomes your personal debt.
The good news: Simple Payment Plans for businesses
The IRS recently expanded its Simple Payment Plans to business taxpayers. If you qualify, you can get a long-term payment plan without a full financial statement, a lien determination or a Trust Fund Recovery Penalty determination.
Generally, a business qualifies if it's current on all filing and payment requirements and owes:
$25,000 or less in assessed tax, penalties and interest when trust fund taxes are involved (up to $50,000 for an out-of-business sole proprietorship), or
$50,000 or less when no trust fund taxes are owed.
The plan has to pay the balance in full by the end of the collection period, generally 10 years from assessment. The longer the plan, the more interest and penalties you pay.
The catch: you have to stay current on new deposits. Falling behind again is how payment plans fail.
The part that didn't get softer: the Trust Fund Recovery Penalty
When a business withholds income tax, Social Security and Medicare from employees' paychecks, that money is held "in trust" for the government. If it isn't paid over, the IRS can assess the Trust Fund Recovery Penalty personally against the people responsible, dollar for dollar on the trust fund portion.
Two things have to be true:
Responsible. You had the duty and authority to collect, account for and pay the taxes.
Willful. You knew the taxes weren't being paid and chose to pay other bills instead, or recklessly ignored it.
Owners, officers and anyone who decides which bills get paid can be in the blast radius. Cash-flow stress doesn't erase that risk.
Your title doesn't decide it
People assume "I'm not the president, so I'm safe," or "I'm the president, so I'm stuck." It doesn't work that way.
The IRS looks at what actually happened: who signed the checks, who was on the bank signature cards, who approved bills when cash was short, and who said "pay the vendor, hold the IRS."
Those facts usually come out in an IRS interview recorded on Form 4180. That interview is where these cases are made. I don't let a client walk into it alone and "just explain what happened."
If the IRS proposes the penalty
The IRS generally sends Letter 1153 proposing the penalty. You generally have 60 days from the date of that letter to file a written appeal. Don't let that pass.
What to do now
If your business has a payroll tax balance:
Keep current deposits current. This matters more than anything else.
See whether a Simple Payment Plan fits while the balance is still under the limits.
Get help before any TFRP interview. Fixing the business debt is much harder once it has become personal debt.
Know that some relief doesn't apply. For example, innocent spouse relief doesn't cover the Trust Fund Recovery Penalty.
Streamlined plans help the company. They don't erase your personal exposure.
Short FAQ
Can I be personally liable for my company's payroll taxes? Yes. Through the Trust Fund Recovery Penalty, the IRS can assess responsible persons who willfully failed to pay over withheld taxes.
What is a Simple Payment Plan for a business? A long-term IRS payment plan for businesses that are current on filings and payments and owe $25,000 or less with trust fund taxes, or $50,000 or less without.
What is Form 4180? It's the IRS interview form used to decide who is responsible for unpaid trust fund taxes.
How long do I have to appeal a proposed TFRP? Generally 60 days from the date of Letter 1153.
Behind on payroll taxes?
Book a free 30-minute call to go over your case. For a quick question, you can call (718) 510-3166. Let's deal with it before it becomes personal.
General info, not advice for your specific case. Every case is different.
