When Business Owners Can Be Personally Liable for Payroll Taxes

Most business owners assume that a corporation or LLC shields them from personal liability. In many situations, that’s true, but payroll taxes are one major exception.

Under federal law, the government can hold individuals personally responsible for certain unpaid payroll taxes through a powerful enforcement tool known as the Trust Fund Recovery Penalty (TFRP).

The Trust Fund Recovery Penalty

Businesses are required to withhold federal income, Social Security, and Medicare taxes from employee wages. Under 26 U.S.C. § 7501, those withheld amounts are legally considered funds held in trust for the United States, meaning the employer is temporarily holding government money that must be deposited with the IRS.

To enforce payroll tax compliance, Congress created the TFRP under Internal Revenue Code § 6672. This statute allows the IRS to impose personal liability on individuals who were responsible for collecting and paying payroll taxes but failed to do so.

Who Can Be Held Personally Liable?

Under § 6672, any “responsible person” may be assessed the penalty. These people can include:

• Corporate officers
• LLC managing members
• Partners
• Payroll managers
• Financial controllers
• Employees with authority over company finances

The IRS doesn’t limit liability to the owner of the business. Responsibility for payroll taxes is determined based on actual authority and financial control, not just job titles.

Why the TFRP Matters for Business Owners

The TFRP allows the IRS to bypass the corporate entity entirely. Once assessed, the government has the authority (via IRS Internal Revenue Manual 5.17.7) to collect against the individual personally through tax liens, bank levies, wage garnishments, or seizure of personal assets.

For many business owners, payroll tax issues escalate quickly because the liability can follow them long after the business itself fails.

Getting Tax Help for the TFRP

Payroll taxes aren’t just another business obligation. Failure to pay them can expose owners, officers, and other decision-makers to direct personal liability under 26 U.S.C. § 6672. If payroll taxes haven’t been paid, immediate action is critical. At Gabaie & Associates, LLC, we help taxpayers deal with complex IRS issues, including the TFRP and payroll taxes. Call (410) 358-1500 or send us a message on our contact form to get started.