The IRS requires employers to withhold income tax and what's known as payroll taxes from employees. Although the employee declares income-tax exemptions and controls, to some extent, the amount of income tax withheld, payroll tax -- for Social Security and Medicare -- is a fixed rate for all employees making up to a certain income limit, which was $113,700 annually as of 2013. If the employer doesn't report or pay the payroll tax to the IRS, serious consequences could ensue for "responsible persons."
In the matter of income and payroll taxes, the IRS could hold you responsible for payment, depending on your job description. If you are responsible for accounting for the tax withheld and reporting it to the IRS, or transferring the money to the government, then you are a "responsible person." This means that accountants and bookkeepers, no matter what their authority within the company, can be held to account if the employer tries to use withheld taxes for other expenses.
Employers are considered trustees for the IRS; payroll taxes go into a trust fund that is used to pay for Social Security benefits and Medicare and other government obligations. If the money goes elsewhere, then any responsible person within the company can be fined up to 100 percent of the missing money. This Trust Fund Recovery Penalty means if your company is behind on payroll taxes by $50,000, for example, you can be held liable, in part or in full, for the full amount of back taxes. You also could pay a penalty of an additional $50,000. Your good intentions and motivation in such a case is irrelevant to the IRS, which only has to show that you willfully violated the law.
Officers and Employees
The Trust Fund Recovery Penalty may apply to you as a corporate officer, board member or executive. If you have the authority to sign checks, draw up contracts, hire and fire employees or decide which creditors and vendors should be paid, then you may also be a responsible person, even if you don't hold an executive position or have no ownership interest in the company. If you work for a payroll services provider and draw up checks for another company, however, then you are simply doing clerical bookkeeping at the direction of others, and would not be a "responsible person" for income and payroll tax purposes.
Social Security Credits
As a non-responsible employee, you are still an employee and still liable for your portion of the payroll tax. This means 50 percent of the total payroll tax liability or 7.65 percent of your gross wages, as of 2013. If the employer shows withheld payroll taxes on your W-2, then he is responsible for reimbursing the IRS if any of those funds are missing. Social Security, in the meantime, uses the W-2 to document money paid on your behalf into the Social Security trust fund. If the payroll taxes don't show up on the W-2, then you're not getting credit for those payments and may be losing eligibility for Social Security disability or retirement benefits.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.