Congratulations! Your employer has promoted you to office manager. You’re excited by the new responsibilities and increase in pay. As part of your job as office manager, you are given authority to write checks for the company and pay outstanding bills. You also have some payroll responsibilities, such as making the monthly federal tax deposits and completing quarterly tax forms, such as the Form 941-SS.
Your employer has confidence in you because you are responsible and trustworthy. But what happens if the Internal Revenue Service thinks you are also “responsible”? Could you become liable for the company’s unpaid employment taxes? The answer is yes, under certain circumstances you could be held personally liable for all your employer’s unpaid employment taxes. How do you protect yourself? This article will briefly explain your potential liability and what you can do to protect yourself.
Employment Taxes: What are they?
Employment taxes are the income, social security and Medicare taxes that an employer withholds from the wages of its employees. For businesses operating in the U.S. Virgin Islands, including tax-exempt organizations, the income taxes that are withheld by an employer are paid to the V.I. Bureau of Internal Revenue. However, the social security and Medicare taxes withheld by an employer are paid to the IRS. Many businesses and tax-exempt organizations operating in the Virgin Islands do not realize that they have a tax obligation to pay a portion of the trust fund taxes—the social security and Medicare taxes withheld—to the federal government.
They may fail to pay the IRS the social security and Medicare taxes withheld because either they paid both the income taxes withheld and the social security and Medicare taxes withheld to the BIR or they just didn’t know they were obligated to pay the social security and Medicare taxes withheld to the IRS.
For some small businesses, there may not be enough funds to pay all of the bills so creditors or vendors are paid first with the expectation that payments to the IRS will be caught up at a later date. Although well intentioned, this could be a costly mistake because the IRS is authorized to impose a penalty equal to the amount of taxes not accounted for, not collected or not paid to the IRS plus interest on the original tax and penalty.
Who may be held liable for failing to pay employment taxes?
When the IRS pursues a business for unpaid trust fund taxes, the officers, directors and employees of that business are often surprised that they are personally financially burdened with the huge penalty. This occurs when the IRS assesses penalties directly against the so-called “responsible persons” in their individual capacity. It is very important to note that the IRS pursues the unpaid trust fund taxes from any individual who had anything to do with running the business, especially those individuals who made financial decisions, handled the books for the business or, most importantly, signed checks on behalf of the business (or had the authority to do so).
The responsible person may not only be an owner, officer or director of the business (or tax-exempt organization), but also may be an accountant, bookkeeper or other clerical employee, particularly if they had the authority to sign checks. This is true even if the responsible person had no formal business training, accounting training or tax training.
How do I prevent personal liability to the IRS for employment taxes?
If you find yourself in the position of a “responsible person,” then you must be able to show that you were either not willful in your nonpayment or were not the person responsible for the payment of the taxes.
The IRS may hold more than one person liable for the unpaid employment taxes so you may find yourself pitted against a co-worker or former co-worker as you both attempt to deny liability.
Actions the IRS may consider “willful” include a responsible person failing to investigate whether employment taxes have been paid or failing to correct mismanagement after being notified the employment taxes have not been paid. If you receive a letter from the IRS that includes Notice 784 or a form titled, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes, be aware the IRS is considering whether you may be personally liable for the unpaid employment taxes.
Before responding to the IRS, signing any documents from the IRS or meeting with the IRS, it is advisable to engage representation with an accountant or legal advisor. This is especially true if you no longer work for the business and, consequently, may not have access to documents that could otherwise demonstrate a lack of responsibility.
On the other hand, if you routinely write checks or pay bills at your employer’s direction and you notice that your employer is directing you to delay making these payments to the IRS or asking you to pay other bills first before paying the IRS, you will need to take steps immediately to ensure that you cannot be held responsible, such as no longer signing checks on behalf of the company or tax-exempt organization.
Also you may want to carefully consider whether you want to accept check signing authority from your employer, especially if you are not an owner, director or key officer in the business. If you are a board member or officer of a tax-exempt organization, you may want to consider whether you want check signing authority or other responsibilities related to the organization’s financial affairs. You may also want to seek the advice of a competent tax professional to ensure that you have adequately protected yourself from personal liability.