Payroll Tax Debt Relief: Here Are Your Options
If you’ve gotten behind on remitting payroll taxes to the IRS — whether you withheld them from your employees’ paychecks or not — I have some good news and some bad news.
I’ll tell you the bad news first.
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Trust Fund vs. Non-Trust-Fund Payroll Taxes
While the government cares about all federal payroll taxes being remitted timely and in full, it makes a distinction between what are called “trust fund” payroll taxes and non-trust-fund payroll taxes.
So when it comes to federal payroll taxes, the universe includes:
- Federal Unemployment Tax (FUTA) — paid 100% by employer
- Federal Income Tax Withholding — paid 100% by employee
- Social Security Tax — paid 50% by employer and 50% by employee
- Medicare Tax — paid 50% by employer and 50% by employee
However, only the following types of federal payroll taxes are considered to be “trust fund” payroll taxes:
- Employees’ federal income tax withholding
- Employees’ share of Social Security tax withholding
- Employees’ share of Medicare tax withholding
These are called “trust fund” taxes because the business is supposed to hold these taxes that the business withheld or should have withheld from their employees’ paychecks “in trust” and remit them to the government.
Important: While payroll tax returns are due at the end of the month following each quarter’s end, all payroll tax returns have a deemed filing date of the later of the date filed or April 15 following the year to which they apply.
The IRS Takes Back Payroll Taxes Very Seriously
The bad news it that the IRS takes unpaid payroll taxes very seriously — in fact, when it comes to negotiations and collections, it is my experience that they take payroll taxes much more seriously than income taxes.
Revenue Officer Assignment
For example, the IRS generally won’t assign a revenue officer to an income tax case unless the individual in question owes at least $250,000.
With payroll tax cases, we generally see the IRS send revenue officers out to business owners’ businesses and even their homes for far less than that.
I’ve had clients who reached out to me because they had gotten behind on their payroll taxes for a couple quarters to the tune of only $25,000 or so, and the next thing they knew a revenue officer was knocking on the door of their business or even their home. ($25,000 seems to be some kind of threshold with the IRS.)
That’s how seriously the IRS takes back payroll tax debt.
And you can see their perspective. The IRS is the federal government’s collection agency at least as far as taxes go.
Where Payroll Taxes Go
And the two largest payroll taxes in the United States — the Social Security tax and the Medicare tax — are not deposited into the general treasury.
These taxes —which comprise over one-third of all federal tax collections — are deposited into trust funds that fund social programs such as Social Security retirement, SSDI, Medicare, and other programs upon which millions of Americans depend each and every month.
And if you’re aware of some of the headlines surrounding the future solvency of the Social Security Trust funds and especially the Old-Age and Survivors Insurance Trust Fund — which funds Social Security retirement — you know the government wants every penny it can get into these trust funds especially as people are living longer.
According to Pew Research, there are expected to be seven times more 100-plus-year-olds on the planet in the year 2050 than there are right now. This means that there are plenty of 70-year-old individuals — people born in 1950, say — today who probably don’t expect they will make it to 100 years old who actually will.
This increasing longevity combined with changing attitudes among younger generations about how to approach their work and their career could create a situation where the Social Security and Medicare programs are severely underfunded.
And the federal government — and by extension the federal government’s collection agency, the IRS — takes that very seriously.
The Trust Fund Recovery Penalty
In fact, the federal government takes payroll taxes so seriously that it can assess a trust fund recovery penalty against anyone the IRS believes had some association with the company’s failure to remits its payroll taxes.
This penalty is equal to 100% of the employee’s share of payroll taxes due — and the scary part is that the IRS can go after the income and assets of whomever it believes is a “responsible person” with respect to the company’s payroll taxes.
(This is why if you can only pay a portion of your payroll taxes at a time, you should first designate your payment to the trust fund portion, i.e., the employee’s share.)
The good news, however, is that you can get some relief from your payroll tax debt, whether your business is still in existence (“in-business”) or whether it has shut down (“out-of-business”).
Payroll Tax Debt Relief For In-Business Taxpayers
If the business with back payroll taxes is still in existence, let me be frank: The IRS is going to want every penny.
However, just because you owe them the money doesn’t mean you will necessarily have to sell assets and pay it to them immediately.
Hopefully, you will be able to prove your case to the IRS that you should have more time to pay off your payroll tax debt — or pay it off in installments.
If you don’t get the IRS to agree to this, the revenue officer may very well come in, start liquidating assets, or even shut your business down.
Whatever the case, if you intend to stay in business, the first thing you need to do is start getting in compliance with your current payroll tax deposits before even starting a negotiation with he IRS.
If this isn’t possible, you may need to make the difficult decision to wind down your business — in this case your payroll tax debt would be an out-of-business case that I discuss in the next section. And out-of-business taxpayers generally have more options available to them.
Payroll Tax Debt Relief For Out-Of-Business Taxpayers
From experience, I know that many businesses with significant unpaid payroll tax issues cannot be salvaged.
I usually know this when I speak to a potential payroll tax client, and they’ve described how they’ve had these payroll tax issues for years and still have these issues currently.
To me, this indicates that this business is not profitable because it does not have the cash flow to pay one of its most important (in the eyes of the federal government, anyway) expenses — its payroll taxes.
In fact, the IRS may eventually shut down their business anyway due to their ongoing payroll tax issues.
In these cases where the business is not viable, and the owner decides to shut down the business, the case then becomes exclusively a trust fund recovery case, which is then an individual matter that can be resolved through traditional tax relief options such as an offer in compromise.
Now, if the business owner is smart — and the trust fund recovery penalty has not yet been assessed, at least not for all quarters — they would sell assets to drum up as much cash as possible to pay off the trust fund portion for which the trust fund recovery penalty has not yet been assessed.
Sometimes, the trust fund recovery penalty has not yet been assessed for any quarter yet; in this case, all the business owner has to do is pay off the trust fund portion of the taxes due and then wind down the business. Then he or she can walk away without fear of the imposition of the trust fund recovery penalty.
The First Thing To Do When You Have Payroll Tax Debt
The first thing we do with our new payroll tax clients is to determine if a collection hold is necessary to prevent forced collection activity from the revenue officer if he or she is being very aggressive with collecting the overdue payroll taxes from the client and not willing to grant more time.
If the deadline has not elapsed, one strategy is to file a Collection Due Process (CDP) hearing, but keep in mind typically a CDP hearing will only be with respect to the particular quarter that recently received the Final Notice of Intent to Levy.
So only that one quarter will be in Appeals, while the revenue officer can theoretically still go after the other quarters.
However, if you like the result you get with Appeals for the one quarter, they can lift the entire case from the revenue officer’s inventory and you can work with Appeals for all of the quarters. (Sometimes the opposite happens, meaning the revenue officer gives you a better deal — but that’s a lot less common in my experience.)
The last thing we want is for the IRS to raid our clients’ bank accounts — or, sometimes even worse, start reaching out to our clients’ customers and going after their accounts receivable!
Payroll Tax Debt FAQs
Here are some common questions business owners have when they have back payroll taxes.
Who is on the hook for payroll taxes?
While the business itself is obviously on the hook for payroll taxes, the IRS can also assess the trust fund recovery penalty against those it deems to be “responsible persons.”
Can the IRS do an SFR for a Form 941?
Yes, the IRS can do an SFR for a Form 941.
That’s why it’s extremely important — when you no longer have employees — to file your last Form 941 as “final.”
Otherwise, the IRS could very well assume you have the same number of employees as you had in the previous quarter and prepare substitute payroll tax returns for you and imposing tax accordingly.
What is the deemed filing date for a Form 941?
Although Forms 941 are filed quarterly, their deemed filing date is the late of April 15 of the year following the year to which they apply or the date the form was actually filed.