Who Is Responsible for Unpaid Payroll Taxes?

Businesses must manage payroll taxes, which include funds withheld directly from employee wages, such as federal income tax, Social Security, and Medicare taxes. These withheld amounts are “trust fund taxes” because the employer holds them in trust for the government. Failing to remit these taxes to the Internal Revenue Service (IRS) can lead to severe financial and legal repercussions for the business and specific individuals. This article clarifies who is responsible when these tax obligations go unpaid.

Identifying Responsible Parties

The IRS can hold specific individuals personally accountable for a business’s unpaid payroll taxes, especially the trust fund portion. These individuals are “responsible persons,” defined not merely by job title but by their duties, authority, and control over the business’s financial affairs. This includes the power to direct the collection, accounting for, or payment of these taxes.

Responsible individuals may include officers, directors, shareholders, members of a partnership, or even employees with significant financial authority, such as a CEO, CFO, or payroll manager. Third-party payers and professional employer organizations can also be considered responsible. The IRS assesses each case individually, examining the totality of the circumstances to determine if a person had the authority to pay taxes. Corporate liability for payroll taxes remains separate from any individual liability.

Individual liability also hinges on “willfulness.” This does not require malicious intent, but rather a voluntary, conscious, and intentional decision to prioritize other creditors over the government. For instance, using withheld taxes to pay business expenses like rent or suppliers instead of remitting them to the IRS is willful behavior. Recklessly disregarding a known risk that payroll taxes are not being paid can also establish willfulness.

Understanding the Trust Fund Recovery Penalty

Individuals are held personally liable for unpaid payroll taxes through the Trust Fund Recovery Penalty (TFRP). This penalty applies to the “trust fund” portion of payroll taxes, which includes federal income tax, Social Security, and Medicare taxes withheld from employee wages. The IRS considers these funds government property from the moment they are withheld.

The TFRP equals 100% of the unpaid trust fund taxes. This means a responsible person can be assessed the full amount that was withheld from employees’ paychecks but not paid to the IRS. The penalty does not apply to the employer’s matching share of Social Security and Medicare taxes or federal unemployment taxes (FUTA).

The TFRP is assessed against individuals who are “responsible persons” and who willfully failed to collect, account for, or pay over these trust fund taxes. While the TFRP targets individuals, the business remains liable for the entire payroll tax liability, including the trust fund portion and the employer’s share, plus any accrued penalties and interest. The IRS can pursue collection from both the business and responsible individuals simultaneously, but the total collected will not exceed the full tax liability.

The Process of Determining Responsibility

The IRS investigates to identify and assess responsibility for unpaid payroll taxes. This process typically begins when the IRS identifies a business that has failed to remit federal payroll taxes, often through inconsistencies in tax returns, third-party reports, or audits. A Revenue Officer usually conducts the initial investigation.

During the investigation, the IRS may interview current and former employees, officers, and other individuals involved in the business’s financial operations. They seek information about an individual’s role, duties, and involvement in financial decisions. The IRS also gathers various documents, such as bank statements, corporate records, meeting minutes, job descriptions, and records of check-signing authority, to establish who controlled the business’s funds.

If the IRS determines an individual is a responsible person and acted willfully, they issue IRS Letter 1153, “Proposed Assessment of Trust Fund Recovery Penalty.” This letter formally notifies the individual of the IRS’s intent to assess the TFRP, outlining specific tax periods and amounts. Recipients of Letter 1153 can appeal this proposed assessment, typically within 60 days of receiving the letter. Failure to respond within this timeframe can lead to a formal penalty assessment.

Resolving Unpaid Payroll Tax Liabilities

Once a payroll tax liability is established or a Trust Fund Recovery Penalty (TFRP) assessed, several options can address the unpaid amounts. The most direct approach is full payment of the outstanding tax liability, including penalties and interest. If immediate full payment is not feasible, taxpayers can set up an Installment Agreement with the IRS.

For businesses, an In-Business Trust Fund Express Installment Agreement (IBTF-Express IA) is an option if the amount owed is $25,000 or less and can be paid within 24 months. For larger amounts or longer payment periods, a non-express installment agreement may be possible, though this generally requires providing extensive financial disclosures to the IRS using Form 433-B. The IRS prioritizes the collection of delinquent employment taxes.

If a taxpayer cannot pay the full liability, an Offer in Compromise (OIC) may be a possibility. An OIC allows certain taxpayers to settle their tax debt for a lower amount than what is owed, based on their ability to pay, income, expenses, and asset equity. While an OIC can be challenging to obtain for payroll taxes, it may be considered for individuals assessed the TFRP. Continuous compliance with all future filing and payment requirements is necessary for any resolution.