Guess what? If your businesses fails or files bankruptcy you are personally liable for employment taxes withheld from employees and not remitted to the government. Many business owners are oblivious to this until they get a notice in the mail from the IRS. The tax liability, penalties and interest can add up quickly and be financially devastating to an individual. Thus, it is imperative an owner have an active role in the understanding the employment tax system and liability.

Federal employment taxes (including Social Security taxes, Medicare taxes and withholding of income taxes) generally consist of two parts: the employee portion and the employer portion. The employee portion is considered a “trust fundtax” because it was withheld by the employer and paid over to the government. In other words, the money belongs to the employee and is due from the employee to the government, but it is remitted by the employer.

If an employer fails to withhold and pay over trust fund taxes to the government, 26 U.S.C. § 6672 states that an individual agent, servant or employee of a company is personally liable for unpaid withholding taxes where they (1) are responsible for the collection and payment of the withholding taxes and (2) willfully fail to pay over the taxes due. The burden is on the taxpayer to disprove liability by a preponderance of the evidence. Unlike trust fund taxes, the employer portion of withholding taxes (including penalties and interest) is due directly by the business to the government, and thus, a business’s principal does not have personal liability under 26 U.S.C. § 6672. Accordingly, when liquidating a business, it is often standard operating procedure to ensure that the trust fund portion of employment taxes is paid, while payment of nontrust fund taxes is a lower priority.