You missed a payroll tax deposit

You can be late paying a supplier. You can be late paying rent. You can, at a push, be late paying yourself.

Payroll taxes are not on that list, and the reason is specific: a large part of that money was never yours. It was withheld from your employees' wages and held by the business on the government's behalf. That portion is called trust fund tax, and being late with it exposes the people who control the money — usually you, personally — in a way no other business liability does.

That is not a scare tactic. It is the single most important thing to understand about the letter or the bank alert in front of you.

What actually happened

A payroll tax deposit is separate from filing the return. The return reports; the deposit pays. Employers deposit on a schedule the IRS assigns — commonly monthly or semiweekly, based on prior-period liability — and it is possible to file every return perfectly on time while having missed the money entirely.

Usually one of four things has gone wrong:

• Cash was short and someone made a decision to hold the deposit for a week.
• A payroll provider's debit failed because the funded account was short on the day, and nobody read the notification.
• You changed banks or accounts and an authorisation did not follow.
• The deposit schedule changed at the start of a year and the old rhythm carried on.

The last two are common and are pure administration. They are also the easiest to miss, because nothing feels wrong.

Do this today

1. Work out exactly what is unpaid, by period. Not roughly. Which quarter, which deposit date, how much, and how much of it is trust fund — the withheld income tax and the employee share of FICA — versus the employer share. The two are treated very differently and you need the split before you talk to anyone.

2. Pay what you can, immediately. Interest and penalties accrue on the unpaid balance, so partial payment made today is better than full payment made next month. Make it electronically so it is dated and traceable.

3. Do not fund it by skipping the next one. Rolling one missed deposit into the next period is the single most common way a manageable problem becomes an unmanageable one. It converts an administrative slip into a pattern, and pattern is precisely what changes how this is treated.

4. Call your CPA before you call the IRS. Especially if this is more than one period.

5. Do not borrow from the next payroll's withholding to pay the last one. This is the point at which owners stop being late and start being personally liable for a growing number.

Why the personal liability part is real

Under federal law the IRS can assess the unpaid trust fund portion personally against any person responsible for collecting and paying it who wilfully failed to do so. That is a wide net. It can reach an owner, a partner, an officer, a bookkeeper or an office manager with cheque-signing authority — anyone with the duty and the ability to direct payment.

Two things people get wrong about it:

• "Wilful" does not mean malicious. It generally means you knew the money was owed and paid someone else instead. Paying a supplier so a job could finish, while knowing a deposit was outstanding, is the textbook fact pattern.
• It survives the business. Dissolving the company, closing it, or a bankruptcy does not necessarily clear it, because the assessment is against a person and not against the entity.

This is why a payroll notice belongs at the top of any stack of correspondence, above every other letter you have.

If you cannot pay it at all

There are formal routes, and they exist because this situation is common. Instalment arrangements are available for payroll tax debt, though the terms are stricter than for income tax. What is not available is silence: unpaid employment tax is one of the areas the IRS pursues most actively, and the enforcement path — liens, levies on receivables, in serious cases a visit — moves faster than most owners expect.

Get a CPA, an enrolled agent or a tax attorney on it. Do not negotiate this one yourself, and do not use a firm that cold-called you after a lien appeared in public records.

Making sure it does not happen again

Nearly every case of this we have seen traces to the same root: nobody was reconciling the payroll liability accounts.

Payroll runs, the software books a liability, the deposit goes out, the liability clears. When the deposit does not go out, the liability sits on the balance sheet — visible, sitting there, month after month — and if nobody looks at the balance sheet, nothing says a word until a notice arrives two quarters later with penalties attached.

The fix is not complicated and it is not expensive:

• Reconcile payroll liability accounts every month, against what was filed and what actually cleared the bank
• Keep the payroll funding account separate, and check the debit cleared rather than assuming
• Diarise the deposit dates, and check the schedule again every January in case it changed
• Have someone other than the person who runs payroll look at the liability balances

That last one is not about trust. It is about the fact that the person who ran the payroll already believes it went out.

Related

• You got a letter from the IRS. What to do first
• Surviving your workers comp audit
• Cash flow you can see coming

This is general information about how employment tax deposits and trust fund liability work, not advice about your situation. Deposit schedules, penalty structures and collection procedures change and vary by circumstance. Take advice from a CPA, enrolled agent or tax attorney before acting.