Business owners who fall behind on filing timely returns and paying federal payroll taxes often are faced with unpaid state payroll taxes.[1] The more employees the business has the more complex payroll taxes become. This can be further complicated when business owners are not knowledgeable about the nuances regarding the classification of a worker for employment tax purposes. When business owners fall behind in paying their payroll taxes, the key is retaining the services of a qualified tax firm with experience in addressing both federal and state payroll tax issues to minimize monetary penalties and criminal exposure at the personal level.
What is a Responsible Person?
While the specific details vary from one state to another, a responsible person generally is anyone who has the authority and/or control over a worker. They dictate the terms and do so consistently over time such as scheduling hours to be worked, tasks, pay, etc. These individuals may be held personally liable for the business's unpaid taxes – typically “trust fund” taxes like withholding tax where they are serving merely as a collection and remittance agent on behalf of the state.
Recent Court Cases Shed Insights on Responsible Person Rules
Two recent cases from Illinois and Ohio dealing with the withholding of income taxes offer insights into who the responsible person rules apply to at the state level.
Dalisay Sulit v Illinois Dept of Illinois
In 2020 the Illinois Independent Tax Tribunal found that the president of a healthcare corporation was personally liable as a responsible officer for unpaid Illinois income withholding tax in 2013 and 2014. The president incorporated the taxpayer in 1994. During the years at issue, she was the president and majority owner, her late husband served as vice president and her son was secretary-treasurer. The president became ill, took medical leave, and had her son take over running the business. Nevertheless, despite the son’s admission that he was responsible for the failure to pay, the tribunal found that the president was a responsible officer under Illinois law and liable for the withholding tax.
George J. Papandreas v. Jeffrey A. McClain
The Ohio case involved a Vice President, one of three owners, who claimed he was not liable for the business’s unpaid income tax withholding. [3]. He argued that he lacked any control, supervision, or responsibility for filing the payroll report or making the payments. He maintained that his role was limited to store development (design and construction), leasing, and preparing some legal documents during the formation of the company. He claimed that the other two owners (the President and the Treasurer/Secretary) were responsible for all financial and tax aspects of the business. The Ohio Board of Tax Appeals rejected the Vice President’s contention that he should not be found liable based on the other owners whom he argued were more properly assessed as responsible parties. The Board of Tax Appeals noted that while the other owners may have had responsible roles, the tax commissioner can assess multiple persons under Ohio law and find that, “if more than one person…is personally liable for any unpaid liability, their liabilities shall be joint and several.”
These two cases illustrate two different applications of the responsible party rules within each state’s laws and yet with similar outcomes. In the first case, the taxpayer tried to argue that other parties were more responsible for the tax while in the second, the authority was delegated elsewhere. In both cases, the states rejected these arguments, and the personal liability of these individuals was upheld.
Responsible Persons Can Become Personally Liable for Unpaid Taxes
These decisions at the state level are one of a long line of responsible person (whether referred to as corporate officer or responsible party) cases across the country. Business owners must withhold and remit income taxes on compensation paid to their employees. Failure to do so is a serious matter. Not only is the business liable for the tax but, as found in these cases, officers and directors can be found personally liable leading to substantial monetary penalties and even leaving a business owner vulnerable to criminal prosecution.
Furthermore, these two cases illustrate that a responsible person (i.e. corporate officer or responsible party) is defined as someone with significant control over the business. Although none are dispositive, the indicia of significant control include the authority to direct taxes be paid, ownership of significant amounts of ownership interest, check signing authority, the ability to hire and fire, control over-compensation, and the ability to enter into contracts.
Business Owners Need Not Use Collected Payroll Taxes
In these uncertain times, business owners may be tempted to use collected but the unremitted tax to replace lost revenues in the short term in order to cover expenses. These cases serve as an important reminder that if these taxes go unpaid, states have the authority to hold those deemed responsible personally liable for these unpaid taxes. If you are looking for help with an unpaid state payroll tax problem, contact Agustin Arbulu today for a free tax consultation.
[1] States that do not impose a personal income tax are Alaska, Florida, Nevada, Texas, Arizona, Washington, Wyoming, Tennessee, South Dakota, and New Hampshire.
[2] 15TT236, Dalisay Sulit v Illinois Dept of Illinois, May 20, 2020.
[3] George J. Papandreas v. Jeffrey A. McClain, Tax Commissioner of Ohio, Ohio B Tax Appeals, 2019-991, 04/20/2020.