Penalty for Not Withholding Federal Payroll Taxes

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The penalty for not withholding federal payroll taxes is 100 percent of the tax owed plus related interest. While this may seem harsh, keep in mind the taxes withheld go toward ensuring that employees have adequate care in the event of disability and in old age.

Trust Fund Recovery Penalty

The penalty is covered under the Trust Fund Recovery Penalty (TFRP) law.

Responsible Parties

If the IRS cannot collect from the business, they have the right to hold responsible parties liable and assess penalties against them. This includes owners, shareholders and employees. Basically anyone who knowingly fails to withhold federal payroll taxes may be penalized.

Appeals

If you receive a letter from the IRS stating that you owe money under TFRP, you have 60 days to appeal the decision.

Payroll Withholding

The withholding covered under TFRP includes: Social Security, federal income taxes, railroad retirement funds, Medicare and excise tax. This includes both amounts withheld from the employee's pay and the required employer contributions.

Concerned

If you are concerned that you may be held liable for failure to withhold federal payroll taxes, read IRS Notice 784, "Could You Be Personally Liable for Certain Unpaid Federal Taxes?"

References

• Employer's Tax Guide
• Trust Fund Recovery Penalty