An employee can be held liable for their employer’s unpaid taxes in certain situations. While most businesses withhold their employees’ income and payroll taxes and then transmit them to the IRS, there are cases where employers either do not withhold taxes or do not give the withheld money to the IRS. Employees need to be aware of their responsibilities as both taxpayers and a person responsible for collecting and paying a business’s income or payroll taxes.
Liability for Employee’s Unpaid Taxes
If your employer fails to withhold income or payroll taxes from your paycheck, you are still responsible for paying these taxes to the IRS. If you do not pay these taxes personally, you may face tax penalties, and you may not be eligible for Social Security, Medicare, or unemployment benefits.
However, if your employer withholds taxes from your paycheck, but fails to deposit them to the Treasury, you will receive credit for these paid taxes. Essentially, the government treats this case as though the employer has stolen the money from the government. The employer held your money for the purpose of transferring it to the federal government, and by failing to transmit the funds, they have committed a serious crime.
Liability as a “Responsible Person” for Payroll Tax Problems
A person who is responsible for collecting or paying payroll taxes who willfully fails to pay them may be responsible for paying a Trust Fund Recovery Penalty (TFRP). An employee can be considered a responsible person for TFRP purposes, so your employer’s payroll tax problems could cause the IRS to come after you if you are in charge or collecting or paying these taxes.
Willfulness is shown when a person was aware of the outstanding taxes, and they either intentionally disregarded the law or were plainly indifferent to its requirements. No evil intent or bad motive must be shown. Even if you used the money to pay other business expenses that seemed more pressing the non-payment of the taxes will be considered willful.
The TFRP is equal to the amount of the tax that should have been withheld. The IRS will send a letter informing you that they plan to assess the TFRP against you, and giving you 60 days (75 days if the letter is addressed to outside the United States) to appeal the determination.
Avoid the TFRP by making sure that all employment taxes are collected and paid to the IRS on time.