Why payroll taxes matter to owners

Payroll taxes are not just a business bill. Amounts withheld from employee paychecks are treated by the IRS as trust funds held for the government. If those funds aren’t deposited and reported correctly, the IRS can pursue the business and the people who controlled payroll decisions — often the owners or officers — for the unpaid amounts (IRS: Trust Fund Recovery Penalty).

Key ways unpaid payroll taxes can hit you personally

  • Trust Fund Recovery Penalty (TFRP): The IRS can assess the TFRP against “responsible persons” for 100% of the unpaid withheld taxes (the employee portion of FICA and withheld income tax). This is a civil penalty, separate from the business’s obligations (IRS: Trust Fund Recovery Penalty).
  • Penalties and interest: Late deposits and missing returns accrue penalties and interest that grow quickly (see IRS deposit rules and penalties).
  • Liens and levies: The IRS can file a federal tax lien against your personal property or levy bank accounts and wages to collect unpaid payroll taxes.
  • Criminal exposure: Willful failure to collect or pay over payroll taxes can trigger criminal charges in severe cases (see IRS guidance on willful failure).
  • Credit and borrowing impact: Liens, levies, and ongoing disputes can make it harder to get personal loans, mortgages, or investor capital.

How owners become personally liable

The IRS applies a test to determine who is a “responsible person.” It looks at who had authority over tax deposits, payroll decisions, signing checks, or hiring the payroll service. Both corporate officers and sole proprietors can be found personally liable. Even if the business is insolvent, the TFRP can attach to individuals.

Real-world consequences (anonymized)

In my practice I’ve seen a café owner fall behind after a slow season, use payroll withholdings to cover operating bills, and later face a TFRP assessment that required a personal payment plan. The result: frozen bank accounts, reported liens, and years of credit damage.

What to do immediately if you suspect unpaid payroll taxes

  1. Stop using withheld funds for other bills. Treat withheld taxes as untouchable trust funds.
  2. Reconcile payroll records and deposit histories right away. File any missing Form 941 (quarterly federal return) or state equivalents — delinquent filing increases exposure (IRS: About Form 941).
  3. Contact a CPA or tax attorney experienced with payroll tax collection issues. In my experience, early professional involvement reduces the chance of a TFRP being assessed.
  4. If you can’t pay in full, contact the IRS to discuss collection alternatives — installment agreements exist, but trust-fund portions are treated differently; get professional help before relying on online self-service (IRS: Collection Alternatives).
  5. Preserve documentation showing who controlled payroll decisions; this helps if you need to defend against a TFRP.

Proactive steps to prevent personal exposure

  • Automate and separate: Use a reputable payroll service or software and consider a dedicated payroll bank account so withheld funds aren’t commingled with operating cash.
  • Regular reconciliations: Reconcile payroll tax liabilities weekly or monthly and compare payroll reports with deposits and Form 941 amounts.
  • Set a reserve: Estimate the combined withholding and employer tax burden (often a low double-digit percent of gross payroll) and keep that amount liquid.
  • Internal controls: Limit who can approve payroll, who signs checks, and who can access payroll accounts; require dual approval for withdrawals (see our guide on implementing internal payroll controls).
  • Meet deposit schedules: Employers must deposit withheld taxes on a monthly or semiweekly schedule depending on your lookback period; missing deposit schedules is a common trigger for penalties (IRS: Depositing Employment Taxes).

Longer-term remedies and negotiations

  • Installment agreements: The IRS may allow payment plans. However, collection of trust-fund taxes and TFRP issues can be more complex — negotiate with professional representation.
  • Offer in Compromise (OIC): OICs are generally limited for trust-fund liabilities and rarely accepted for withheld taxes; consult a tax attorney before pursuing one (IRS: Offer in Compromise).
  • Collection due process and appeals: If you receive a proposed TFRP assessment, you have appeal rights; timely professional representation matters.

Resources and related FinHelp articles

Authoritative sources

Professional disclaimer

This article is educational only and not individualized tax or legal advice. For guidance about specific payroll-tax exposures, consult a licensed CPA, enrolled agent, or tax attorney who can review your records and represent you before tax authorities.