Taxes: How to Deposit Employment Taxes

It’s widely known that employers are required to deposit employment taxes with the federal government in a timely fashion. However, the potential consequences of a failure aren’t as well-publicized. If you are treated as a “responsible person” for this purpose, you may be personally liable for an amount equal to 100 percent of the tax liability.

In other words, the shortfall might come right out of your own pocket!

Liability may be avoided only if you can show that the failure to pay taxes wasn’t willful. If you simply know about an employment tax deficiency-or should have known-and you ignore the problem, it is considered to be willful neglect.

Who is a “responsible person” for this purpose? Unfortunately, there’s no-clear cut definition in the tax law. Each case is decided on the its own merits. However, the courts have traditionally focused on three key factors:

1. Status –Are you an officer or high-ranking employee of the company or do you otherwise have an ownership interest in the company?
2. Duty –Is the duty to manage, oversee or otherwise administer the financial affairs of the company stated in writing? If so, does it specifically pertain to the payment and collection of employment taxes?
3. Authority –Do you have the authority to ensure that employment taxes are properly collected and paid? Do you have authority to sign checks, hire and fire employees and so on?

Note that the responsibility isn’t necessarily limited to just one person in the company. It can be extended to multiple parties who could be held jointly or severally liable.

Practical approach: Don’t put yourself at risk. Take steps to ensure that payroll taxes are paid in full and on time. If other amounts are owed, make sure that the IRS is paid first. Using an outside payroll services firm can help ensure compliance.