Personal liability with employment taxes

Where are the taxes?

The IRS imposes several taxes on businesses. Among these are what are known as the employment taxes, which are, in part, to be withheld from an employee’s paycheck and remitted to the IRS in monthly or quarterly basis. That portion which is withheld from the employee’s paycheck for the IRS is known as the Trust Fund tax. As you, the employer, are holding the monies in trust, for the IRS. Often times employers fall on hard times and make the decision to use these monies to cover other expenses. This is not only morally wrong but can have serious legal consequences.

I’m shielded by my LLC, right?

No. While it is true that using an LLC to conduct business will generally shield you from liability, this is not true in cases involving the Trust Fund tax. In most other instances, the IRS will simply go after the assets of the entity and will collect exclusively from them. However, when it comes to the Trust Fund tax, generally, no LLC or corporate entity can shield individual owners or managers from liability.

Signers liable too

After the IRS determines a deficiency in the payment of the Trust Fund tax, the Service conducts a series of interviews to determine who should be held liable. The interview generally aims to make those who had spending authority liable for not making a payment to the IRS. This can encompass even those individuals who hold relatively low-end positions. Those liable can include anyone with a credit card, or access to spending account. Each individual’s liability will be determined by the agent conducting the interview. After the interviews conclude, the agent determines who among the interviewed should be held liable for the deficiency. This determination can be disputed; however, this is one of the more difficult determinations to dispute. After this point each individual is jointly and severally liable.

What does “jointly and severally liable” mean?

This means that each individual named is responsible for the entire amount of the debt. For example, if you and 10 others are found liable for a $100 deficiency each and every person found liable will owe $100. However, as soon as the debt is paid down, the amount due is also lowered for everyone.

How do I avoid this?

The best way to avoid a scenario that ends with you being found jointly and severally liable for a trust fund tax deficiency is to pay all taxes as they come due. Business owners sometimes panic and seek to pay whatever bills they can with the monies they have on hand. Many business owners fall into a trap by thinking “I can pay that back later.” The truth is that the money you collect from employees for the IRS is not yours at all, and you should not use it for any purpose other than to remit those amounts due to the IRS on a monthly or quarterly basis. We generally recommend keeping those funds in different account. If you cannot manage this task, it may be time to close your doors.

What do I do if this happens?

If you have been through this process and now find yourself in the midst of collections, levies and liens, make sure you do not ignore the letters you receive from the IRS or the agent that has been assigned to your case. Often clients tell us that the letters become overwhelming, and that they simply put them away without opening them. Rest assured, that ignoring the problem will not make it go away, if fact, it can often exacerbate the issue.

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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