Release Date: 10/ 31/ 2006
Liability for Payroll Taxes: Beware, the Buck Stops With the Employer
When an employer distributes payroll checks to employees, the employer becomes a trustee to the U.S. government for any amount withheld. If the IRS uncovers problems in the deposit of payroll taxes, the government will ultimately hold the employer responsible. Outsourcing payroll services can eliminate many of the simple mistakes that result in IRS penalties. However, if a payroll provider causes a payroll error, then the IRS can still pursue taxes, penalties, and interest directly from the employer.
Penalties are not confined to company assets, but can also be brought against individuals in the company. The IRS has the power to seize assets or garnish salaries/pensions of any "responsible" persons to recover the unpaid taxes. This can include officers, directors, and even high-level employees. The IRS reports that 40 percent of small businesses pay an average penalty of $845 per year for late or incorrect payroll filings.
For example, in Pediatric Affiliates, P.A. v. U.S., 97 A.F.T.R.2d 2006-1329, a company hired a payroll vendor to service its entire payroll accounting needs. Though the company properly submitted all of its tax payments to the provider, the provider embezzled the funds. In addition to exacting criminal and monetary penalties from the vendor, the IRS also placed a levy on the company's assets. In upholding the levy, the court stated that a company's reliance on a bookkeeper, controller, or outside payroll service does not excuse any failure to comply with payroll taxes. The company was held responsible for overseeing the acts of the vendor and bore the ultimate responsibility for all tax obligations.
To protect against payroll taxes penalties, consider the following:
- Take the necessary steps to determine whether company payroll taxes are current. Even if an employer has no knowledge that a company's payroll taxes are delinquent, employers still can be held liable.
- Spend time researching payroll providers. Investigate not only references, pricing, and security, but also whether the provider offers protection against service errors. Many national payroll providers now provide a tax guarantee pledging to cover any payroll tax penalties.
- Resist the temptation to use trust funds. Financial troubles can make the need to pay immediate expenses seem more important than payroll taxes, but remove the temptation by placing trust funds in a separate account. Otherwise, in addition to financial penalties, criminal convictions resulting in incarceration and fines are also possible for any failure or delinquency.
For more information, please contact the NFIB Legal Foundation at (800) 552-6342 or legalfoundation@nfib.org.
