As an employer, you’re responsible for withholding and remitting payroll taxes. But, what happens if you don’t pay them? Who takes over the unpaid payroll tax burden? Keep reading to find out who is responsible for unpaid payroll taxes.
Overview of payroll taxes
Before we jump headfirst into learning who is liable for unpaid payroll taxes, let’s briefly recap what payroll taxes are.
Payroll taxes consist of federal, state, and local income taxes, federal and state unemployment taxes, state-specific taxes, and FICA tax.
Withhold federal, state, and local income taxes, Social Security and Medicare taxes, and some state-specific taxes (if applicable) from employee wages.
Typically, the employer is responsible for paying federal and state unemployment taxes (FUTA and SUTA taxes). However, employees in Alaska, New Jersey, and Pennsylvania must also pay state unemployment tax.
FICA tax (Federal Insurance Contributions Act) is made up of two taxes: Social Security and Medicare. Both you and your employee contribute to FICA tax. FICA tax is 15.3% of each employee’s taxable wages. Take a look at how FICA tax breaks down:
You only have to contribute and withhold Social Security tax up to the Social Security wage base, which typically changes from year to year. When an employee earns more than a certain amount, you must also withhold an additional percentage (0.9%) from their wages for Medicare tax. However, as an employer, you are not responsible for contributing to the additional Medicare tax rate.
Who is responsible for unpaid payroll taxes?
Now onto the good stuff. The part you’ve all been waiting for: who is responsible for unpaid payroll taxes?
It all boils down to a person … a “responsible” person, that is. When a business fails to remit payroll taxes, the IRS has the ability to collect said taxes from “responsible persons.” So, what counts as a responsible person?
A responsible person is anyone within or outside of the business with significant control or influence over the company’s finances. According to the IRS, this can include a single person or a group of people who have the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.
The employee portion of Social Security and Medicare taxes and income taxes are considered “trust fund taxes” because you withhold them from employee wages and hold them in a “trust” until they need to be paid to the IRS.
A responsible person or persons may be one of the following:
Officer or an employee of a corporation Member or employee of a partnership Corporate director or shareholder Member of a board of trustees of a nonprofit organization Another person with authority and control over funds to direct their disbursement Another corporation or third-party payer Payroll Service Providers (PSP) or responsible parties within a PSP Professional Employer Organizations (PEO) or responsible parties within a PEO Responsible parties within the common law employer
Trust Fund Recovery Penalty
So, how do the unpaid payroll taxes land in the hands of one of the people above? If the payroll taxes are not paid in the correct amount and on time, the IRS can impose a hefty penalty called the Trust Fund Recovery Penalty (TFRP).
The employees’ total withholdings (the employee portion of FICA tax and income taxes) are the taxes subjectContinue reading