What employers should know about unpaid payroll taxes, personal exposure, and the steps to take now
Falling behind on payroll taxes can happen quickly. A slow-paying customer, an unexpected expense, or a cash-flow crunch can leave an employer choosing which bills get paid first. But payroll taxes are different from most business debts. The amounts withheld from employees’ wages are considered trust fund taxes because the employer is holding that money for the U.S. Treasury until it is deposited.
When those taxes are not deposited, the IRS can pursue the business for the unpaid employment taxes, penalties, and interest. In some situations, it can also assess the Trust Fund Recovery Penalty (TFRP) against individuals the IRS determines were responsible for the taxes and willfully failed to collect, account for, or pay them over. That can turn a business tax problem into a personal liability problem.
What is the Trust Fund Recovery Penalty?
The TFRP is a penalty authorized under Internal Revenue Code Section 6672. For employment taxes, it generally equals 100% of the unpaid trust fund portion: federal income tax withheld from employees plus the employees’ share of Social Security and Medicare taxes. It does not generally include the employer’s matching share of Social Security and Medicare taxes in the TFRP calculation.
The IRS describes two key elements: responsibility and willfulness. A person may be considered responsible if that person had the duty and authority to collect, account for, or pay the taxes. Willfulness does not require fraud or a bad motive. It can exist when a responsible person knows, or should know, that payroll taxes are unpaid and chooses to pay other creditors instead.
Important: A business does not have to be closed for the IRS to consider a TFRP assessment. The issue can arise while the company is still operating.
Who can be personally liable?
The IRS looks beyond job titles. Potentially responsible people can include owners, officers, partners, directors, shareholders, employees, payroll or accounting personnel, and others who have meaningful control over business funds. Factors can include authority to sign checks, decide which creditors are paid, make federal tax deposits, hire or fire employees, control payroll, or exercise independent judgment over the company’s finances.
More than one person can be assessed. By the same token, merely having access to the books or performing clerical duties does not automatically make someone responsible. The IRS generally focuses on actual authority and decision-making power.
If you are behind in payroll taxes, act before the problem grows
The worst response is usually to ignore the problem while continuing to use current payroll tax money for operating expenses. New payroll tax deposits continue to come due, and the balance can compound through penalties and interest. The goal should be to stop the liability from growing, determine exactly what is owed, and communicate with the IRS when appropriate.
Checklist: What to do if you are behind on payroll taxes
| Stop the bleeding. Make current payroll tax deposits on time going forward whenever possible. Staying current helps prevent new quarters from becoming delinquent. |
| Confirm all payroll tax returns are filed. Identify any missing Forms 941, 944, 940, W-2/W-3 filings, or state payroll filings. Unfiled returns can make resolution harder and may lead to IRS substitute assessments. |
| Reconcile the numbers. Compare payroll reports, bank records, tax deposits, and filed returns by quarter so you know which periods are unpaid and how much is trust fund tax versus employer tax. |
| Protect payroll tax funds. Do not treat employee withholding as working capital. Consider a separate payroll tax account or tighter controls over tax deposits. |
| Prioritize current compliance. When cash is limited, distinguish current payroll tax obligations from older liabilities. Remaining current is often essential to any workable resolution. |
| Review IRS notices immediately. Do not miss response or appeal deadlines. Keep copies of every notice, envelope, payment confirmation, tax return, and communication. |
| Identify who controls financial decisions. Document who had authority over payroll, bank accounts, tax deposits, check signing, and creditor payments during each delinquent period. |
| Do not sign TFRP documents without understanding them. If you receive Letter 1153 or Form 2751, review the proposed assessment, tax periods, and your appeal rights before agreeing. |
| Evaluate payment and resolution options. Depending on the facts, options may include full payment, an installment agreement, collection alternatives, or other IRS resolution procedures. |
| Get professional help early. Payroll tax cases can involve both business liability and personal exposure. Early review can help organize records, address notices, and build a strategy before deadlines pass. |
What happens if the IRS proposes the TFRP?
The IRS may interview individuals involved in the business to determine who had responsibility for the unpaid taxes. If the IRS proposes a TFRP assessment, it generally sends Letter 1153 with Form 2751. If you disagree, the letter explains how to request an appeal. This is an important stage because the facts about authority, knowledge, control of funds, and the timing of decisions can matter greatly.
Once assessed, the TFRP is a personal tax liability. The IRS may pursue collection against the responsible person, including available collection tools permitted by law. That is why it is important to deal with payroll tax delinquencies before they reach the personal-assessment stage whenever possible.
Common mistakes that make payroll tax problems worse
• Paying vendors, lenders, owners, or other expenses while knowingly allowing employee withholding to remain unpaid.
• Continuing to run payroll without a realistic plan to make the related federal tax deposits.
• Ignoring IRS notices or assuming the issue will be handled automatically by a payroll provider.
• Failing to file returns because the business cannot pay the tax. Filing and paying are separate obligations.
• Waiting until a TFRP interview or proposed assessment to reconstruct who controlled the company’s finances.
The sooner you address the problem, the more options you may have
Being behind on payroll taxes is serious, but avoiding the issue usually makes it more difficult and more expensive. A practical response starts with accurate records, current compliance, a clear understanding of which periods are delinquent, and a plan for communicating with the IRS. If a TFRP investigation has already started, the response should also focus on the specific facts surrounding responsibility and willfulness.
| Need help sorting out past-due payroll taxes? Contact me to review where you stand, organize the delinquent periods, and discuss practical next steps before the problem grows. 303-881-9762 | ralphp@lptaxandbookkeepingpros.com | www.lptaxandbookkeepingpros.com |
General information only. This article is not legal advice and is not a substitute for advice based on your specific tax situation. IRS rules and procedures can change.
Sources: Internal Revenue Service – “Trust fund taxes,” “Employment taxes and the Trust Fund Recovery Penalty (TFRP),” and Publication 15 (2026), Employer’s Tax Guide.