Most of the revenue collected by the IRS doesn't come from payments submitted with tax returns. It comes from amounts withheld from employees' wages (income tax and payroll tax). Since they represent around 70% of the IRS's revenue, unpaid payroll taxes are taken very seriously.
If you have unpaid payroll taxes, you should address them as quickly as possible before the IRS assesses penalties. You should also be aware that the liability for these taxes is different than almost any other tax — the IRS has broad powers to collect some unpaid payroll taxes from multiple people affiliated with a business.
Payroll taxes are a common name that refers to amounts withheld from employees' paychecks to fund Medicare and Social Security. They are also called FICA taxes (FICA stands for the Federal Insurance Contributions Act, the law that created these taxes).
As of 2024, the tax rate for Social Security is 6.2% of the first $168,600 of your income. Employees also pay 1.45% of their wages as Medicare tax plus an additional 0.9% (2.35% total) on earnings over $200,000 for single filers ($250,000 for married couples filing jointly). The employee pays these amounts, and their employer pays a matching amount.
The Difference Between Payroll Taxes and Trust Fund Taxes
Payroll and trust fund taxes overlap, and although some people use these phrases interchangeably, but they are not the same thing.
Payroll taxes are the the taxes used to fund Social Security and Medicare, including both the employee and the employer's portion of these payments. They also include federal and state unemployment taxes which are paid by employers.
Trust fund taxes, on the other hand, refer to all of the taxes withheld from an employees' paycheck. This includes the employee's portion of FICA taxes, but it also includes income tax withheld from the employee. Employers' are meant to hold these amounts "in trust" until they remit them to the government.
So How Big a Problem is Unpaid Payroll/Trust Fund Taxes?
Unpaid payroll taxes and trust fund taxes amount to about $91 billion. As the amount of all types of unpaid taxes is $441 billion, that means that employment taxes make up over 20% of unpaid IRS taxes.
Some of the unpaid employment tax is due to business owners who simply got behind. But in other cases, it's due to outright fraud. The Tax Division of the Department of Justice works together with the IRS and the U.S. Attorneys to litigate financial judgments, injunctions, and criminal convictions against people who have committed employment tax fraud.
If you have unpaid payroll taxes, the IRS may assess penalties and interest on your account. They can also seize your assets, garnish your wages, or take the funds from your bank account. Here are some of the penalties the IRS assesses for unpaid payroll taxes:
- One to five days late — 2% of the taxes due
- Six to 15 days — 5% of the taxes due
- 16 days late or within 10 days of the first IRS notice — 10% of the taxes due
- 10 days after the first IRS notice — 15% of the taxes due
For instance, you owe $1,000 in payroll taxes. Your penalty will be $20 if you pay a day late. It can climb to $150 if you are significantly late.
The IRS also assesses interest on your unpaid balance. As of 2024, the annual interest rate is 5%. The rate adjusts on a regular basis.
Additional Requirements for Not Paying Payroll Taxes on Time
The IRS will send you Form 2841 (Notice to Make Special Deposits of Taxes) if you have unpaid payroll taxes. After receiving this notice, you must put future payroll tax withholdings in a separate trust account, and you must deposit them within two days of when you withhold them from your employees.
If you ignore this notice, you can face jail time of up to one year and a fine of up to $5,000. LLCs and corporations can even be criminally prosecuted.
The Trust Fund Penalty is Even Worse
Unpaid payroll taxes almost always include trust fund taxes. If you have unpaid trust fund taxes, the IRS will send Letter 1153 (Trust Fund Recovery Penalty Proposed). You can face a trust fund recovery penalty of 100% of the taxes owed and this penalty can be assessed on multiple people.
Who is Liable for Unpaid Payroll Taxes?
With most unpaid taxes, the IRS can only hold the individual or business that owes the taxes responsible. However, this is not the case with the trust fund portion of payroll taxes.
If a business has unpaid trust fund taxes, the IRS can hold any person responsible for collecting, accounting, or paying these taxes liable. This can include the following:
- Business owners
- Corporate officers, directors, or shareholders
- Partnership members
- Employees
- Third-party payers
- Responsible parties at a payroll service provider or professional employer organization
Generally, the IRS will only hold you responsible if you willfully didn't pay the tax. For instance, if you are the business owner and you told your bookkeeper to pay the electric bill instead of the trust fund taxes, you are responsible. Similarly, if you are an employee who made the decision not to pay this tax, you can also be held responsible. On the other hand, if your boss told you to write the checks and didn't make the decision to ignore the payroll tax, you are likely not responsible.
IRS Options for Unpaid Payroll Taxes
You may be able to make arrangements for your unpaid payroll taxes. The IRS has a variety of options for people with unpaid taxes including:
- Payment plans — Paying your unpaid payroll taxes in monthly installments.
- Penalty abatement — The IRS sometimes agrees to waive some of the penalties for late payroll tax deposits, but the IRS will almost never waive the trust fund recovery penalty.
- Offer in compromise — In very rare cases, you may qualify to settle your unpaid payroll taxes for less than you owe.
If you can’t afford to pay your taxes because of economic hardship, the IRS may agree to mark your account as currently not collectible (CNC). Although you may be able to apply for hardship status on some of the payroll taxes, the IRS usually will not grant hardship exceptions for trust fund recovery penalties.
You can also apply for an offer in compromise to settle your payroll taxes for less than you owe. But if the unpaid payroll taxes include trust fund taxes, the IRS will only approve your offer if the remaining portion of the trust fund taxes is paid by one of the other responsible parties.
Note that if your business hired a payroll company and the payroll company failed to pay the taxes, you may be a victim of payroll provider fraud or failure. In this situation, you may be able to settle your payroll taxes without worrying about the trust fund penalty.
Can You Go to Jail?
Yes. For Instance, look at what happened to these business owners.
- Alphonso Tillman — The owner of two companies, Tillman failed to pay his payroll taxes for several years. He had to pay restitution of $2.2 million and serve a 24-month sentence in prison.
- Beth Pettyjohn — After not paying payroll taxes for several years, this business co-owner had to pay almost $4.7 million in restitution plus a $25,000 fine. She also received a 28-month prison sentence and three years of supervised release.
- Michael and Laurie Russell — This Nebraska couple did not pay over $300,000 in payroll taxes that they withheld from their employee's paychecks. They had to pay $311,486 in restitution. Plus, Micheal was sentenced to 16 months in prison, while Laurie faced a six-month sentence.
Bottom Line: Get Help Dealing With Unpaid Payroll Taxes
If you have unpaid payroll taxes, you need to get help before the situation escalates. A tax professional experienced with unpaid payroll taxes can help you negotiate with the IRS and work out the best possible arrangement for your situation. Don't let the penalties grow on your unpaid payroll taxes. Don't risk the IRS taking serious collections action against you. Instead, reach out to a tax professional and get help today.