When Business Owners Become Personally Liable for Business Taxes

In  the next few months, many small businesses will struggle to survive due to the economic impacct of COVID-19.  In order to survive in difficult times, business owners often have to make decisions on what they should and shouldn't pay, and often it comes down to making decisions that have no good answers.  

For example, an employer may have enough cash to fund payroll checks to their employees but not pay the payroll taxes. If they don’t make payroll, their business may cease to exist, and/or their reputation may suffer. The urge is to make payroll and worry about the taxes later. My experience with entrepreneurs is that by nature, they are optimistic about the future and sometimes these business owners believe that they will get caught up next week.

I urge you to be careful when delaying tax obligations. While many debts and obligations, including some tax debts, are solely the responsibility of a corporation or LLC, there are some debts and obligations that put the personal assets of the owners at risk.

What Tax Debts Have Personal Liability Risk?

Generally, the tax debts that put the personal assets of an owner or Responsible Person at risk are trust or fiduciary funds. These are funds that the business is holding in trust for a 3rd party. There are two main taxes to be very concerned about:\

1. The Trust Fund Portion of Fiduciary taxes. Federal, Social Security, and Medicare tax withheld from employees, as well as State and Local tax withholdings.
2. Sales Tax that is collected from the customer.

As stated above, these are funds held in trust that belong to others. In the case of payroll withholdings, these are the employee’s monies and need to be paid to the government. With Sales tax, they are the customers monies and belong to state and local governments.

In my experience, governments are much more aggressive in collecting fiduciary funds than income taxes. They tend to look at this as theft. In the case of payroll withholdings, not only does the IRS not get the revenues, they may have to send to the employees for taxes they never received.

Which Taxes Do Not Typically Become Personal Liabilities?

On the other hand, while the government does want to receive all taxes, there is a lower priority on income taxes and the portion of payroll taxes paid by the employer. In almost all cases, if a corporation or LLC goes out of business and owes non fiduciary taxes, the debt does not follow the owners personally.

I’m going to expand into the Payroll Tax issue a bit more in the next week or so with more information on who is responsible (Hint – it may include non-owner employees) as well as ideas on how to best resolve these issues.

Do You Need Help?

If you need help with a any IRS issue, I’d be happy to talk with you. Please give me a call at (972) 821-1991 or email me at bob@jablonskyandassociates.