What if I don't pay my payroll taxes? We were asked this payroll question recently, and here's our answer: you should never ever fail to pay your business payroll taxes!
What happens if I don't pay my employer payroll taxes or my withheld employee payroll taxes?
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When asked this question recently by a small business owner, we were shocked to think that somebody might think they could get away without paying payroll taxes.
It's very important to pay your payroll taxes because you will be held personally liable for them, even if you think you have limited your liability through your company's legal structure.
Personal Liability for Payroll Taxes
The federal tax code imposes personal liability on any "responsible person" who fails or refuses to collect and pay the required taxes.
A responsible person includes someone who controls the employer's money, has signature authority on a payroll account or is a corporate officer.
As outlined in Section 6672 of the Internal Revenue Code, the responsible person is personally liable for a 100% payroll penalty for any failure pay withheld taxes from employees. In other words, you personally will owe the IRS all of that money.
Note that this is for employee payroll taxes that you have withheld, not for the employer payroll taxes. The covered employee taxes include federal withholding and the employee FICA and Medicare taxes withheld.
Bankruptcy Won't Get Rid
of Your Personal Liability for These Debts
A scenario in which a business owner might be tempted into not paying payroll taxes owed is when things are really tight.
Instead of missing a payroll or an important vendor payment, a desperate business owner might use the withheld payroll taxes from a previous payroll to pay current obligations.
You should never do this. If the business is struggling that much, a bankruptcy filing may be around the corner.
While filing for company bankruptcy will stall and/or eliminate many business debts, the IRS has taken steps to ensure that your debts to them will not go away.
Obligations to government agencies for taxes, interest and penalties survive bankruptcy proceedings.
You can close the company down and distribute assets to creditors on a pro rata basis, but you will need to pay the government in full, even if it comes out of your own pockets.
You can even go to jail if you fail to live up to your tax obligations, and ignorance or mistakes are no excuse in the "eyes of the government" for your not paying correctly.
So, a word to the wise – treat your payroll tax obligations to the IRS as sacrosanct. As tempting as it might be to use that money for other purposes, don't do it.
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