If you have read our article, Payroll Taxes – What Are They and Who Pays Them? on this website, you know that payroll taxes are “employee withholding taxes.” You also know that payroll taxes consist of employees’ income tax as well as their portion of Social Security and Medicare taxes.
Many people fear what might happen if the IRS discovers that they have failed to pay all the income tax they owe. Indeed, there can be very serious consequences in those situations. At the same time, many people with those worries also happen to be business owners who never contemplate what might happen if they fail to make payroll tax payments.
The fact is that the IRS is far less open to payment plans and other settlement offers for delinquent payroll taxes than it is for delinquent individual income taxes. The IRS’s “default” position is to shut down any business that has fallen behind in its payroll taxes, so there is often no opportunity for the business to attempt to repair the situation.
In addition, the IRS is more likely to file criminal charges against the owner of a business that falls behind on payroll taxes than against an individual who owes income tax. If the IRS can obtain a criminal conviction if it can show that you “willfully failed” to withhold or pay over withholdings. Conviction is punishable by up to a $10,000 fine or five years in prison, or both.
Under a legal concept called the Trust Fund Recovery Penalty, every single person involved in the payroll process and in the business’s financial decision-making can potentially be held individually liable for the entire tax delinquency. Even if the business you own is a corporation, the IRS can “pierce the corporate veil” and treat the payroll delinquency as your personal responsibility.
In other words, the IRS behaves as though it hates delinquent payroll taxes. To the extent we are willing to attribute emotions to a government agency, this is not too much of a stretch. The IRS and the law consider failure to collect payroll taxes and turn them over to the United States Treasury a form of theft.
Here is why: In addition to being referred to as “employee withholding taxes,” payroll taxes are sometimes called “Trust Fund Taxes.” The tax money actually belongs to the employees. It was never the employer’s money to begin with. The Internal Revenue Code entrusts the employees’ money to the employer – but only for a short period of time. Under the trust rules, the employer is obliged to withhold the money and pay it over to the IRS every time its cuts a paycheck. When employers fail to withhold and turn over the money, they are stealing directly from their employees as well as engaging in tax evasion against the United States government. You could even say that it’s a “double theft.”
In addition, every time an employer cuts checks to its employees without withholding taxes and remitting them to the United States Treasury (or pays the employees in cash instead of cutting checks), the employer gets further behind in its payroll taxes. If a business pays its employees every two weeks, then that business has 26 opportunities to fall further behind each and every year. Payroll tax delinquencies are a problem that only gets worse once it has begun. And, again, it’s theft.
That is why the IRS hates delinquent payroll taxes.
Do you have concerns about the way your business handles its payroll taxes? The Law Office of Shawn N. Wright will be happy to assist you. Phone (412) 920-6565 today. Your initial consultation is always free!
To learn more about the pitfalls you should avoid so that you never fall behind in your payroll taxes, read our article, Payroll Taxes: How to Avoid Problems Before They Start, on this web site. To learn about how to handle an IRS investigation of your payroll taxes, read Owe Payroll Taxes? This Is What You Should Expect From the IRS.