October 1, 2014  
 
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Payroll Penalties

 

Not Paying Payroll Taxes

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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Paychex Payroll Service Review
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Conversation Board

Are you just now finding out that you are personally liable for company payroll taxes? Do you know someone in that predicament? Please share your story with others.

Bob 10/1/2009

Who do you report someone to if you know they haven't been paying their employee taxes for 15-16 years? Is there an easy way to report payroll tax fraud?

Ken Gaebler 10/2/2009

Bob, there is an IRS tax fraud hotline for reporting tax violations. Report tax fraud to the IRS by calling that number: 1-800-829-0433. You can report tax cheats anonymously but you need to provide enough information on a tax cheat for them to decide that it warrants an investigation.

Worried worker 1/30/2010

so would an employer who has paid all his employees off the books, and refuses to put them on the books qualify? I once, this guy had us doctor up his records to make it look like he pulled in less cash so he wouldnt have to pay tax. He pays no tax for all his employees. He also hasn't been paying my coworker and I lately our weekly pay. I have already given notice of leaving, and I'd still like to get things straightened out with the money he owes me and the government.

Ken Gaebler 1/31/2010

Worried Worker, that definitely sounds like payroll tax evasion to me. Paying employees off the books, in cash, is a common way to avoid employment taxes for the employer and income taxes for a worker. It's not wrong to pay employees in cash, but the business owner still has to pay employment taxes. It also sounds like the business is underreporting revenues. So, yeah, this is tax fraud.

Working for a Shady Employer 3/31/2010

My employer has not paid taxes in months! He owes at least 70,000+ in back taxes that he is taking out of peoples paychecks. Not to mention that he has withheld our pay twice to (audit payroll). Which by the way was a huge lie. He is robbing Peter to pay Paul right now and none of his partners know about this...what should I do?

Ken Gaebler 3/31/2010

Working for Shady Employer, a business that cannot afford to pay its payroll taxes is a bankruptcy waiting to happen. You should dust off your resume and start interviewing for a new job. Regarding reporting the company for not paying payroll taxes, you might think that this is an ethical dilemma. If you call them in for payroll tax fraud, it may result in the business closing down and everybody getting fired or in some of your close friends/colleagues getting laid off. This is not a legitimate reason to turn a blind eye to payroll tax fraud. You should get your own personal parachute ready by starting to look for a new job and then, fairly soon, report the company to the IRS for tax fraud by calling 1-800-829-0433.

baseball vendor 4/10/2010

what if the employer claims you are an independent contractor? I work as a vendor at a ballpark. Three of the companies treat us all as employees. But one company claims we are independent contractors and does not pay taxes on us. The three who have us on payroll are corporations but the one who does not payroll us but instead pays us under the table cash is not incorporated. The company in questions does not keep records on us nor do they require us to prove we are eligible for work. Basically anyone who works for the company in question is undocumented.

Mark 4/12/2010

Well baseball vendor, it sounds like that one vendor should be classifying you as an employee but instead is misclassifying you as an independent contractor. You could call the IRS on them

sales man 4/12/2010

My previous employer would 1099 me and I was a salesman and project manager for the company. I would have to pay self employment tax and was not an independant contractor. Is this considered tax fraud? What would happen if I turned him in to the IRS. He also carried no workers comp ins on me.

Ted Rigg 5/3/2010

My daughter worked for a sea food restaurant. The owner would work her long hours then at the end of the week pay her a check for so many hours then cash for so many hours so she would not be considered full time and have to give her benefits or pay workers compensation or unemployment ect. Then once she withheld all the employees checks for 6 weeks and said the fed-ex driver did not deliver the checks, which is baloney. Then when she finally did get a check she told my daughter that she owed her $160.00 if she wanted her check. She gave an excuse like she figured the taxes wrong and if she takes the check she would owe her $160.00. Well my daughter did not take the check. She quit and found another job. Then the employer now is suing my daughter for stealing $160.00 so she not only did not get paid for 6 weeks she is being sued on top of that. I told my daughter she needs to report that lady to the IRS. who does she think she is. I would have her counter sue somehow for the money she is owed but it would probably cost more than it is worth. Let the IRS ruin the employer's day.

pam 5/4/2010

My brother has received a letter from the IRS that he owes payroll taxes for a time period after his business was closed. There were no payrolls for the dates and amounts listed on the IRS letter. He has no money to get a lawyer. How does he prove he is right?

Annoyed former employee 5/23/2010

I worked for a lawn care company for 3 years in which I averaged anywhere from $20 to $30K a year. I was laid off back in december and whenI applied for unemployment the goverment tells me that they don't have any record of the company for the past two years. I have sent my W2 to them twice as proof but they have yet to go after the company for failure to report and actually want me to go investigate it! I have also found out that recently they have not reported my earnings to Social Security eventhou they were taknig out taxes for it. I'm rather upset and would like to know what I have to do to fix this issue!

Payroll Tax Expert 5/24/2010

Pam, usually a well-written letter to the IRS can close the issue out. Annoyed Former Employee, in your case I would recommend that you call the state unemployment agency's fraud hotline, which you would find on the state unemployment benefits website for your state. Good luck to both of you.

boomer 6/14/2010

I was layed off with five employees My employer has two of them working 30 hours a week and paying them under the table for their same work This can't be legal

perplexed employee 8/9/2010

How can you learn whether or not your employer has paid your payroll taxes? Employer is talking about laying off employees shortly but with no concrete date. All of us suspect our employer has has trouble paying payroll taxes on a timely basis. Employees have worked more than 6 years and fear there will be no unemployment tax paid on their behalf so can't collect unemployment when the door finally closes. Is there a way to know if their individual payroll taxes have been paid up to date or not?

Ken Gaebler 8/10/2010

Perplexed, you and your fellow employees will be able to collect unemployment benefits, and the State will audit the employer to determine what UI Taxes are due. On a related note, you can always get the best answers to questions on unemployment taxes by contacting your State Unemployment Insurance Agency. Best to do it by mail, as it tends to get more and quicker attention. Good luck!

InLimbo 8/10/2010

Been working for a few years at a small company. Several months ago, instead of my usual direct deposit I was given a papercheck. Same thing the next time, and the reason I was given was that we were low on funds. Long story short, the boss has been largely preoccupied with things outside of this business, and despite having more cash flow at times he continued to pay me via check. These checks btw are the same amount I would've netted after taxes.. so to me, i'm getting the same amount of money and how/when those taxes are reported (i assume) is not my responsibility as an employee receiving net pay amounts. 6 months later it came up that I was NOT on the books since the paper checks, there was no intention of paying any payroll taxes (despite me only taking home net pay). He said he informed me i was off the books when he told me he couldnt' make payroll and would have to pay me with a paper check. He said he couldn't have paid me legitimately or it would've put us out of business, so he was doing me a favor b/c i would've been out of a job several months ago... It was never expressed to me in any significant way that I was not only being paid off the books, but taking a significant cut in pay b/c remember despite his claim that i was off the books, i was still taking home the net pay after taxes NOT my gross pay as it would be if i were truly off the books. This whole thing came to light when after two years he was explaining why i wasn't getting a raise, and that he had the company continue to be open this year for my sake alone, and i'm not buying it. Now i've expressed my concern and uneasiness with the tax situation, and he said if i chose to have the taxes paid at this point that the busines would close, and knowing that i still decided to do the right thing here and pushed him to fulfill the legal obligations he has. My concern is that he is going to pull something to make it seem like I didn't work all that time, or that i knew i was off the books which Ididn't. He doesnt' seem to be letting me go just yet like he insinuated would happen, and i can't quit or i lose unemployment... I'm hoping he'll fix the issue soon and then let me go... but I frankly just don't trust him anymore to do the right thing and fear he will make things even more difficult.. bad enough I was told the company would fold if i elected to have him do the right thing here - but now it seems he doesn't intend on closing so quick and i just want out of here. i dont' know what sort of legal leg i have to stand on .. am i at fault here in any way for letting this happen? Can I force my boss's hand to pay those taxes ASAP? I'm worried that he will put things off and box me into a situation of quitting or ride it out and see if I take legal action. I assume if i take legal action even if I "win" i'll wind up paying a lot of money just to get the facts across.. i see it happen all the time and would rather leave on calm terms.

Shanna 8/12/2010

I was just let go from my job 2 days ago. I have worked for a company for 3 years and was let go via email. I don't believe the company has paid any kind of taxes for even 2009. My question is, will I get unemployment benefits that I just applied for?

David 8/13/2010

InLimbo, a lawyer might take your case on a contingency basis. You could also call the Attorney General for your state or some of the state agencies that should have gotten those taxes. But it may come down to whether you were really a contractor an or employee.

Karen 8/13/2010

Hey Shanna, you will still get those unemployment benefits, unless there's some other reason that you don't qualify for them. Unemployment benefits are paid out of a state fund, not out of any individual account set aside from your employer. No worries, except for finding a new job. Yuck.

DAVE 8/23/2010

In the year 2010, my employer has been paying their employees payroll with manual checks and we have not been receiving a print out of how much we have earned, pto time, amount of taxes paid thus far. i have received in the mail my annual social security report showing that so far my employer has not paid any taxes into social security. What do I need to do to have my company liable and show that I have had taxes taken out of my pay

Bus. consultant 9/24/2010

I am helping out some investors that put money into a company and wanted me to find out where their money is going. The owner has not paid payroll tax for over 18 months and has 13 employees. Is there a way he can start paying his tax liability through a payment plan, or will the government immediately shut him down and freeze assets when he comes clean? He has also not paid sales tax, or personal taxes, or taxes for the LLC.

I am paying payroll taxes 9/27/2010

I am a business owner. My payroll is with Paychex and I pay my payroll taxes. I have made the decision to decrease hours of all my employees instead of downsizing. Can my business pay the utility bills of all my employees? Can my business pay any of the personal bills for my employees? How would this be listed as an expense for my business?

tonia 9/28/2010

I know someone that owe the irs tax money and he works off the book to avoid paying back his tax money. How will i go about reporting him?

Ken Gaebler 9/30/2010

Tonia, report IRS tax fraud by calling 1-800-829-3676 toll-free. Request IRS Form 3949-A, Information Referral. This form for reporting IRS tax fraud can also be downloaded from the IRS website. If you don't want to fill out the tax fraud reporting form, you can just write a letter reporting tax fraud to: Internal Revenue Service, Fresno, CA 93888. You don't have to identify yourself, but the IRS will take the tax fraud report more seriously if you do. Include the name and address of the person you are reporting; their taxpayer identification number (social security number for an individual or employer identification number for a business); a description of how they are not paying taxes and how you know that your allegation is true; the years that did not pay taxes; an estimate of how much money is involved; and your contact information, if you are willing to provide that. Hope this answers your question on how to report tax fraud. Good luck!

Help!! 12/23/2010

I am in business with my husband now for 13 years and we are now behind in payroll taxes and im having a hard time dealing with this. My husband makes all final decisions on when to pay and we have fallen so far behind I'm quitting my position because of his decisions he makes. As a spouse named on a business how do I get my name off due to unreconcileable business differences and is there any kind of innocent spouse rule for this? I am petrified of going to jail for this so I have quit my position with the company however my name is still on all documents. What can I do??

Ken Gaebler 12/23/2010

If you are a business owner, whether you made the decision to not pay payroll taxes or not, you could definitely be held liable. I would talk to a good attorney ASAP and see what they have to say. Good luck. It sounds like a horrible situation, but hopefully you can get through it and get to happier days.

needs to stop 12/27/2010

I know of a couple ppl that have worked for this man for over 4 years and was paid under the table until april of this year when he decided to do the right thing as he put it. the employees also ever claimed their pay either, if he was to be reported what would happen to both the employees and the employer?

Ken Gaebler 12/28/2010

Needs to Stop, if the employer is reported, the IRS will likely take action against them. Ultimately, they will go after the employer's personal assets, filing a tax lien or taking levy or seizure action. It is highly unlikely that they will chase after individual former employees, but that is also a possibility.

how do i stop this lady 12/28/2010

I worked for a restaurant that had just taken over from another restaurant. I was asked if I could wait a week after payday to get paid. I knew things were tight so I said o.k. then everytime payday came around it was the same thing. I continued working for them because jobs were hard to come by, but in december of 2009 they let me go, the owner said she would calculate how much they owed me and get my pay to me. I found out throught the unemployment office that they were not even registered, never paid employment taxes, also they did not carry workers comp and i never received a w-2 from them. I ended up filing a labor claim against them in march of 2010 and won a judgement in june of 2010 but still have not been paid the money they owe me. Now i hear she is doing the same thing to other employees. Is there anyway to stop her or collect the money she owes to me and other employees?

Kathy 1/3/2011

I am a bookkeeper for a company that has not paid payroll taxes since August, 2010. Quarterly reports were filed and appropriate taxes W/H from employees' paychecks. I am not an officer of the company not do I have signature on our bank account. What is my liability? Should I refuse to do payroll??

Ken Gaebler 1/3/2011

Kathy, personal liability for unpaid payroll taxes can be imposed upon the person "responsible" for paying payroll taxes to the government. That can include a bookkeeper. This is covered in Internal Revenue Code Section 6672. Long story short, you do not want to do the bookkeeping for a firm that is not paying its payroll taxes.

Missy 1/6/2011

I am a bookkeeper for a contractor that has paid a small amount of temporary employees under the table. A check is written to them and the owner says to write it off to tools and equip. I have told him this is wrong because he is defauding the IRS and Worker's Comp. Can I be held responsible?

mar11 1/14/2011

Working for a moving company who pays under the table. Reporting this company would the workers be subjected to pay back taxes both, federal and state too?

Jeff 1/14/2011

My boss doesn't have money for withheld payroll taxes since august. He has given me payroll checks, but told me not to cash them. I now have 24 weeks that I am holding. When the IRS catches up to him, will I get my money or am I going to lose all my payroll that is yet to be cashed? He only keeps enough money in the account to pay his bills.. Help

Ken Gaebler 1/14/2011

Missy, yes, bookkeepers can be held responsible. Jeff, wow, I don't even know where to start. Your boss isn't paying you at all. You may as well be getting toilet paper. Cash what you can, quit the job and talk to an attorney. The IRS catching your boss is the least of his problems -- the business cannot even make payroll!

Lulu 3/19/2011

How do you find out what an employers tax ID number is without asking them if you want to report them for tax fraud?

Ken Gaebler 3/20/2011

Lulu, you shouldn't need the company's employer tax id number (EIN) to report them. Just the name and address of the company will suffice.

Confused 3/30/2011

I was recieving cash for a waitress job. A family-owned Diner. I'm a college student and needed the money. The owner ended up only letting me work 2 days a week for about a month. Then lowered me down to 1 day and then finally the last 3 weeks he would call me in the morning saying "I think it's going to be slow... don't bother coming in" That continued for 2 more weeks and then I recieved the same phonecall followed by "Oh and you should start looking for another job... we're closing down soon." I drove by 3 days later on my way to school and there was a huge FOR SALE sign and it was entirely shut down. Since then I've worked for a school district as a TA but now I am back in college and cannot work at the school because they run at the same hours (It is an on-call job so I am still employed, I just do not accept the job offers that interfere with school). Due to this I filed for unemployment. Do I have to tell them I worked this "off-the-books" job? Is there a penalty for that? Will they disqualify my unemployment?


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