Protect yourself from the 100% penalty on payroll taxes

As an employer, you’re responsible for collecting payroll taxes from employee
wages and depositing the taxes with the IRS. The IRS takes these rules very
seriously – so seriously that if your business willfully fails to deposit payroll taxes on
time, the responsible person could be held personally liable for a penalty of 100% of
the past due amount. In other words, if your company comes up short on payroll
deposits, you might have to pay the entire balance out of your own pocket.

Who is a “responsible person” for purposes of the penalty? You can be
considered a responsible person when you’re the active owner of the
business. The definition can also be extended to others with authority over
disbursing funds, such as the treasurer or other officer of the company, a
bookkeeper, and even an independent third party.

For example, in one court case, a corporate vice president had an agreement
with the president of the company that stated the vice president wouldn’t
exercise control over funds, although he had check writing authority if the
president was out of the office. Nevertheless, the vice president was found to
be a responsible person.

What is a “willful failure?” Typically, the penalty will apply if you knew or
should have known about the unpaid payroll tax liability.
What can you do to protect yourself? Make complying with payroll rules a
top priority. Stay aware of due dates by setting up a “tickler” or reminder file, or
notifications on an electronic calendar. Follow up to ensure that deposits have
been made on time. Assign the task of payroll collection and deposits to a
reliable employee and train backup staff to fill in during vacations or other
absences.