I have written about this issue about a year ago, but it never hurts to completely understand the ins and outs of employee withholding taxes.
The IRS calls withholding taxes “trust taxes” because an employer is obligated to hold the taxes in trust until they are remitted to the Internal Revenue Service. In jargon, trust taxes are often referred to as 941 taxes; because the quarterly report all employers are required to submit to the IRS each quarter is called the IRS form 941.
Depending on the number of employees your company has, you are obligated to remit all taxes withheld within a certain number of days of the payroll the deduction occurred. Taxes can be deposited by check, money order or cash to a bank authorized to accept employment tax deposits, or through the Electronic Federal Tax Payment System (EFTPS).
One of the most important responsibilities of all shareholders, members, officers and directors of a company is to make sure all employment taxes are paid on time and all reports are remitted on time and accurately. The reason this is so important is each of the above named parties can be held jointly and severally responsible for paying those taxes personally if they don’t get paid. If you are a minority partner or a minor officer of a company that doesn’t take care of these important details you may have to pay this obligation yourself.
The IRS takes the responsibility of reporting and remitting trust taxes very seriously, but you aren’t likely to get a call from the IRS the first time you fail to make a required payment. It may even take 2-3 years for the IRS to come knocking on your door. By that time a medium sized company can accrue hundreds of thousands of dollars of liabilities, penalties and interest.
Every now and then you might hear a business owner claiming that they settled their tax liability for pennies on the dollar. Don’t believe them if they are talking about trust taxes. It may be true that the IRS will settle personal tax obligations as well as company income taxes that were not paid. It is very rare when the IRS settles employment taxes for less than 100% of the original liability.
There is a way you can protect yourself if you are a minority shareholder, absentee shareholder, officer or director not responsible for taxes being paid. First and foremost insist on seeing evidence of the payment and a copy of every 941 tax report. The second is completing an IRS 8821 form completed. This form allows you to receive copies of all correspondence related to tax matters that are sent by the IRS to the company address. If your company misses a tax payment, the IRS will send a notice to the company address and if you have completed an IRS form 8821, you will receive one also. This allows for management accountability.
The bottom line is the IRS has many tools at their disposal to recover unpaid trust taxes and you really don’t want to experience any of them first hand.