Understanding Payroll Tax Debt
Payroll taxes are employment taxes that employers withhold from employees and match. The IRS considers the employee portion a trust fund—money that belongs to the government, not the business.
- Social Security tax (6.2% employee, 6.2% employer)
- Medicare tax (1.45% employee, 1.45% employer)
- Federal income tax withholding
- Trust fund portion creates personal liability
Trust Fund Recovery Penalty
The TFRP holds responsible persons personally liable for unpaid trust fund taxes (employee withholdings). The penalty equals 100% of the unpaid trust fund portion. Responsible persons include anyone with authority to pay bills or with control over financial decisions.
Who Is a Responsible Person?
The IRS can assess TFRP against multiple people within a business.
- Business owners and officers
- Directors with financial authority
- Bookkeepers and controllers who decide which bills to pay
- Anyone who signs checks or has signature authority
Resolution Options
Payroll tax debt can be resolved through several IRS programs, though the IRS is generally stricter with employment taxes than individual income taxes.
- Installment agreement (business or personal)
- Offer in Compromise (more difficult for payroll taxes)
- Currently Not Collectible status
- Penalty abatement for reasonable cause
Frequently Asked Questions
Yes. The Trust Fund Recovery Penalty makes responsible persons personally liable for the employee withholding portion (trust fund taxes). This liability survives bankruptcy and business closure.
The debt doesn't disappear. The IRS will pursue collection against the business and assess TFRP against responsible persons. Personal liability for trust fund taxes survives business closure.
Yes, but it's more difficult. The IRS is stricter with trust fund taxes. You'll need to demonstrate genuine inability to pay through income and assets, and all returns must be filed.
The IRS has 10 years from the date of assessment to collect payroll taxes. However, certain actions can toll (pause) or extend this period.
Use a reputable payroll service, make deposits on time (often semi-weekly for larger employers), file Form 941 quarterly, and keep current—the IRS prioritizes current compliance over resolving past debt.