In tough economic times, businesses, like households, are sometimes faced with deferring payment of creditors.  In making difficult choices, you need to know that owners, officers and employees of the business who make these decisions, or who supervise those who make them, can incur personal financial liability for certain types of unpaid taxes.  These taxes are often referred to as “trust fund” taxes, but as discussed in this bulletin, personal liability is not limited to situations where tax was collected from a third party and not remitted to the taxing authority.

Federal Payroll Taxes

The federal tax laws impose personal liability (in the form of a 100% penalty) upon those officers and employees (need not be an officer) who have responsibility for filing payroll tax returns (primarily Form 941) and seeing to it that these taxes are paid.  Such individuals are often referred to as “responsible persons”.  Income tax withholding and the employee’s share of FICA are the taxes usually involved, and the IRS’s easiest targets are those who sign payroll tax returns and those who have check signing authority, plus their supervisors who decide which creditors to pay and which not to pay.  The IRS can and often does assess multiple parties and sorts out the facts later.

If tax assessments are not successfully defended and become final, the IRS will place liens on the property of responsible persons, garnish their wages and levy on their bank accounts.  If notices come from a taxing authority, it is best not to ignore them.  The statutes of limitation for collection are long (typically ten years or more) and “trust fund” taxes are not dischargeable in bankruptcy.

State and Local Taxes
In general, the state and local responsible person rules for income tax withholding are comparable to the federal rules described above.  In addition, states generally (including Ohio, Kentucky and Indiana) impose personal liability on those responsible persons whose companies fail to remit sales and use taxes to the state.  The states often define responsible person more broadly than the IRS.  For example, Ohio Rule 5703-9-49 provides that if the officers of a corporation or limited liability company own, collectively or individually, more than 50% of the ownership interest in the entity they are deemed responsible for the fiscal execution of the entity regardless of any attempt to delegate such responsibility if, for example, the company fails to file a sales tax return, or files a return without paying the tax.  Thus, under this rule, an “absentee owner” holding an officer position could be a responsible person.

Although sales and use taxes are generally referred to as trust fund taxes, responsible person liability in most states, including Ohio, Kentucky and Indiana, is not limited to tax not initially collected or collected but not remitted, but also to additional tax later found due under audit.  For example, if tax was not charged because the seller erroneously believed an exemption applied, responsible person liability attaches.  Similarly, failure to pay consumer use tax on purchases is covered by responsible person liability.

Conclusion
Business operators do not ordinarily think of themselves as having personal liability for the debts of the business, but certain taxes are exceptions to the rule.  These exceptions should be kept in mind when the choice becomes which creditors to pay.