Personal liability with employment taxes

The funds withheld from an employee’s paycheck and remitted to the IRS on a monthly or quarterly basis cannot be used for any other business expense under any circumstances.

What it means: These funds are referred to as the Trust Fund tax, and do not belong to your business – you are holding them in trust for the IRS.

  • Use these funds to pay the associated taxes as soon as they are due, and for nothing else.
  • If these taxes are not paid on time, the IRS will pursue these funds aggressively.

Keep in mind: The liability protection of LLCs and corporate entities does not shield business owners from liability regarding the Trust Fund tax.

  • In the case of a Trust Fund tax deficiency, the IRS will conduct a series of interviews with business employees to determine liability.
  • Any individual with spending authority for a business can be held liable, regardless of their position in the corporate hierarchy.
  • Each individual is held jointly and severally liable for the collective debt, meaning that each individual is held liable for the full amount rather than a proportional share of it.

What to do: Collect these funds in a separate bank account and leave them alone.

  • Plan your expenses assuming these funds do not exist, because they belong to the IRS from the moment they are collected.
  • Should you find yourself in a collections issue with the IRS, do not ignore their communications – engage with the agent for your case and figure out a solution.
Michael Faehner

Michael J. Faehner

Michael J. Faehner is the founder of Faehner PLLC in Oldsmar, Florida. Michael focuses his practice on estate planning, corporate,…

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