Managing Payroll Tax Debt: You Realize You're Going to Be Personally Liable for Those Too, Right?
With payroll taxes, the IRS is always lurking.
The code is impossibly complex and as a business owner, you have SO much to do. You're juggling employees, business operations, quality control and about a thousand other things. And that’s why many business owners find themselves payroll tax debt problems.
Why Do Payroll Taxes Cause Such a Huge Problem?
Recording and depositing payroll taxes for the IRS is critical for every employer because the IRS takes them more seriously and more urgently than any other tax. As a business owner, you need to withhold and pay these taxes to the IRS regularly.
The concept sounds simple enough at the outset, but as you probably already know, life happens. Cash flow gets tight, vendors start to bitch, you get anxious, and before you know it, making sure the business is operating smoothly makes paying Uncle Sam down on your list of priorities.
No big deal, though.
You’ll catch up next month when cash flow is better.
Spoiler alert: Next month gets hit with a new set of challenges, and as each month goes by, you dig yourself deeper and deeper into payroll tax debt hell.
And then you find out you’re going to be personally liable…
For some Reason Business Owners Try to Resolve Payroll Taxes Without a Plan
In a desperate attempt to stay afloat, many business owners make things worse in their frantic attempt to fix everything quickly. They begin shuffling funds around, taking loans, and digging up cash from beneath the couch cushion in a way that resembles how a chicken with its head cut off might deal with it.
They delay paying suppliers, cut back on employee hours, and even tap into their personal savings. Some take high-interest loans—anything to get a quick fix and the IRS off their backs.
It’s a game of financial Jenga—one wrong move, and everything comes crashing down.
And, inevitably it does.
Playing Financial Jenga Doesn’t Work (Shocker)
Moving money around and taking on more debt is like slapping a band-aid on a bullet wound. Sure, it might provide some very temporary relief, but it doesn’t address the underlying issue and you’re still bleeding profusely. High-interest loans only add to your financial burden, creating a vicious cycle.
And what happens when you run out of personal savings? Now you’re not only in trouble with the IRS but also jeopardizing your personal financial security.
The IRS is ruthless.
They don’t care about your juggling act—they want their money, and they’ll cripple your business and then you if they don’t get it.
Here’s How To Resolve Payroll Tax Debt
It isn’t just about paying off your payroll tax debt.
It’s also about strategically navigating IRS Revenue Officers, the code and the Internal Revenue Manual.
I breakdown how you should handle payroll tax debt in multiple steps below:
Get into Compliance:
Get your house in order.
First and foremost, you MUST file all overdue employment tax returns.
There can be no excuses.
This shows the IRS that you’re serious about resolving the issue but it’s much more serious than that.
The IRS WILL NOT negotiate a resolution to your payroll tax debt until you’re in compliance and everything that’s supposed to be filed is filed.
The IRS will levy your bank account, pay (from third-party vendors and others too) and potentially assets until all of your payroll tax returns (Form 941 and Form 940) are filed.
Strategically Make Payments: Once you’re in compliance and know how much you owe, you want to start paying down the balance with equity available in assets before things get dicey with the Revenue Officer.
We touched on the idea that you’re ultimately going to be held liable for the payroll taxes even though your business incurred them.
Let’s discuss this concept further.
The tax you’ll get hit with personally is the trust fund portion of payroll taxes. Trust fund taxes are the taxes you took from your employee's checks, i.e. income and FICA taxes, that you were supposed to hold in trust and pay to the IRS.
This is where strategy becomes crucial.
When you start paying down your payroll debt, always pay the “trust fund” portion first.
You pay the trust fund portion first because each $1 of trust fund payroll taxes that you pay reduces the payroll taxes your business owes for which you’ll be held personally liable.
That’s why you MUST make it crystal clear that any payments you make are applied to trust fund payroll taxes before anything else. Otherwise, the Revenue Officer will apply your payments against payroll taxes generally, without taking into account whether your money goes towards the trust fund portion or not.
Takeaway: MAKE SURE payments made are being applied to the trust fund portion of the payroll taxes owed.
Negotiate Both Business and Personal Resolutions:
A full-blown negotiation comes next.
The first negotiation will be about assets your business has with equity available that can be sold. After that, the negotiation becomes about how much your business can pay monthly while still being able to operate effectively.
The negotiations surrounding your business are crucial.
It’s not so easy to convince the IRS of what your business needs to operate, whether that be assets or funds. If you don’t put up a fight, the Revenue Officer will determine what’s appropriate. This is bad.
At some point during the discussions, the Revenue Officer will start the Trust Fund Recovery Penalty investigation.
They’re investigating who to assess personal liability for the trust fund portion of the payroll tax debt. If you’re the sole business owner, it’s likely going to be you. Nevertheless, the Trust Fund Recovery Penalty Investigation is a an important discussion for another day.
If the IRS determines that you’re personally liable for the trust fund taxes, you’ll be assessed the “Trust Fund Recovery Penalty." Negotiations will begin about your personal assets and how much YOU can pay monthly.
Let me be clear: when your business owes payroll taxes, you’ll likely end up with business tax debt AND a personal tax debt because of the Trust Fund Recovery Penalty and you’ll have to negotiate a resolution for your business AND yourself. At the end, you’re stuck paying both installment agreements at the same time.
Here’s the understatement of the century: When it comes to payroll taxes, a strategic approach and effectively negotiating a resolution are complex.
It’s brutal.
TL;DR (Too long; Didn't Read) -
Most business owners fail to save themselves and their businesses because they juggle funds or take on more debt without planning ahead, working strategically, or addressing the core issues.
Here’s what I Recommend in a Nutshell:
Assess Your Situation: Payroll tax debt can cripple your business and your personal finances. Assess what needs to be filed in order to become compliant and how much and for what years taxes are owed.
File Unfiled Returns: Immediately prepare and file any and all employment tax returns that are overdue to get your business into compliance. If you’re not in compliance, the IRS will not negotiate a resolution to the outstanding debt and will aggressively enforce collections.
Prioritize Payments: Liquidate assets and make payments towards your payroll taxes but make sure the payments are first applied to the trust fund portion.
Negotiate Collection Resolutions: Negotiations with the Revenue Officer assigned to your case are intense. Plus, you’ll need to negotiate a resolution for both your business and yourself. You’ll also have to pay pursuant to both resolutions at the same time.
Fellow tax professionals and business owners,
Let’s talk about this!
Have you navigated the treacherous waters of IRS payroll tax debt?
What was your experience like?
Share your stories and insights below.
Let’s start a real conversation about the struggles and triumphs of resolving payroll tax debt with the IRS.
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It’s sincerely appreciated.
