Responsible Person Liability For Payroll Taxes

The Internal Revenue Code (Section 7501) states that payroll taxes withheld from an employee’s paycheck are held in trust for the United States and must be paid to them.  Withholding these funds and then not remitting them to the United States when you’re supposed to do so can result in substantial penalties for any person who is a “responsible person” in the business that owes the taxes.

The determination of status as a “responsible person” is based on the facts and circumstances of each case.  Factors for determining who is a responsible person, include:

• If the person was identified as an officer, director, or principal shareholder of the corporation, a partner in a partnership, or a member of an LLC;
• The duties of the officer as set forth in the by-laws;
• Whether the person had authority to sign checks;
• Identification of the person as the one in control of the financial affairs of the business;
• If the person had authority to determine which creditors would be paid and those who exercised that authority;
• Identification of the person as the one who controlled payroll disbursements;
• If the person had control of the voting stock of the corporation; and
• Identification of the person as the one who signed the employment tax returns.

Yet, having one of these titles or responsibilities is not enough.  The person must possess the authority within the business to cause the payroll taxes to be paid when they were owed. This applies whether or not the person actually exercises this authority.  Just having it is enough.

The penalties associated with failure to pay payroll taxes can be severe.  They can be imposed on any person deemed to be a responsible party.  If the IRS is assessing these penalties against you as a responsible party schedule your free consultation by calling (480) 888-7111 [or submit a web request here].