Unpaid Payroll Taxes: What to Expect and Resolution Options
The majority of revenue collected by the IRS doesn't come from payments submitted with tax returns. It comes from amounts withheld from employees' wages. These withholdings include income tax and payroll tax, and because they represent about 70% of the IRS's revenue, the agency takes unpaid payroll taxes 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.
What Are Payroll Taxes?
Payroll taxes refer to amounts withheld from employees' paychecks to fund Medicare and Social Security. You may also hear them called FICA taxes — FICA stands for the Federal Insurance Contributions Act, the law that created these taxes.
As of 2022, the tax rate for Social Security is 6.2% of wages up to $147,000. 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.
Payroll Taxes Versus Trust Fund Taxes
Payroll and trust fund taxes overlap. Sometimes, people use these phrases interchangeably, but they are not the same thing.
Payroll taxes specifically refer to the taxes used to fund Social Security and Medicare. They include 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, in contrast, 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.
Tax Gap From Unpaid Payroll Taxes
The tax gap is the amount of taxes due but never paid to the IRS. Payroll taxes and trust fund taxes make up about $91 billion of the gross tax gap. As the annual tax gap 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 fraud. The Tax Division of the Department of Justice works with the IRS and the U.S. Attorneys to pursue financial judgments, injunctions, and criminal convictions against people who have committed employment tax fraud.
When Are Payroll Taxes Due?
The due date for payroll taxes varies. Depending on your total tax liability you may have the following due dates:
- The 15th of the month for payroll taxes withheld the previous month.
- Every Wednesday for payroll taxes withheld on Wednesday, Thursday, or Friday of the previous week.
- Every Friday for payroll taxes withheld on the previous Saturday, Sunday, Monday, or Tuesday.
- On the following business day if you owe $100,000 or more in accumulated employment taxes on any day.
- Federal unemployment taxes (FUTA) are due on January 31 if you owe $500 or less for the year.
- FUTA taxes are due on the last day of the month following any quarter where your total FUTA due is $500 or more.
You must use the Electronic Federal Tax Payment System (EFTPS) to pay your payroll taxes.
When Are Payroll Tax Returns Due?
You don't file a return when you pay your payroll tax. Depending on your situation, you may need to file several of the following payroll tax returns:
- Form 941 (Employer's Quarterly Federal Tax Return) due April 30, July 31, October 31, and January 31.
- Form 944 (Employer's Annual Federal Tax Return) due January 31.
- Form W-2 (Wage and Tax Statement) due January 31.
- Form W-3 (Transmittal of Wage and Tax Statements) due January 31.
- Form 940 (Employer's Annual Federal Unemployment Tax Return) due January 31.
- Form 943 (Employer's Annual Federal Tax Return for Agricultural Employees) due January 31.
You get 10 extra days to file your Form 941 if you made all of your payroll tax deposits on time.
What Happens If You Have Unpaid Payroll Taxes?
If you have unpaid payroll taxes, the IRS may assess penalties and interest on your account. The agency can also seize your assets, garnish your wages, or take the funds from your bank account. Here are some of the potential penalties for unpaid payroll taxes:
Penalty for Late Deposit of Payroll Taxes
If you deposit your payroll taxes late, the IRS will assess the following penalties on your account.
- 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
Say 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.
Interest on Unpaid Payroll Taxes
The IRS also assesses interest on your unpaid balance. As of 2022, the annual interest rate is 3%. The rate adjusts on a regular basis.
Requirement to Make Earlier Payroll Tax Deposits
The IRS will send you Form 2841 (Notice to Make Special Deposits of Taxes) if you have unpaid payroll taxes. Once you receive 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 be criminally prosecuted.
Trust Fund Recovery Penalty
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. This penalty can be assessed on multiple different 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. 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
- 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. However, if you wrote the checks under the direction of your boss but 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 — You may qualify to pay your unpaid payroll taxes in monthly installments.
- Penalty abatement — The IRS may agree 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 rare cases, you may qualify to settle your unpaid payroll taxes for less than you owe.
Can You Apply for Hardship Status on Unpaid Payroll Taxes?
If you cannot afford to pay your taxes due to 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 will generally not grant hardship exceptions for trust fund recovery penalties.
For example, when the owner of a dental office failed to pay his trust fund taxes from 2012 to 2014, the United States filed a lawsuit against him to reclaim the taxes. The defendant argued that he had undergone severe personal hardship, and he had.
During the two-year period, his son, sister, and brother-in-law died. He was supporting his late son's family as well as his wife who was not in good health. He also had heart and back surgery and went into treatment for opioid addiction. He even got a note from his doctor saying that he was not mentally capable enough to pay the taxes during the time period.
However, even this long list of stressful elements was not enough to make the IRS back down. The IRS knew that this employer had withheld the taxes from his employees, and he had also paid other bills instead of the trust fund taxes. The agency wanted its money, and the Fifth Circuit Court of Appeals upheld that decision.
Will the IRS negotiate on payroll taxes?
You can 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.
Do People Really Go to Jail for Unpaid Payroll Taxes?
Yes, you can really go to jail for unpaid payroll taxes. To help you understand the importance of dealing with unpaid payroll taxes, 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.
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.