We are used to feeling the winds blow when we are outdoors in March. But what are those breezes we feel when we are inside our offices in April? They are the effects of exhalations of principals, CFOs, accountants and bookkeepers who have just filed their annual tax returns. Done. Now we can breathe again.
Well, maybe not: Most experienced financial and tax people will tell you that the biggest tax concern for a business is making certain that the company timely pays federal income taxes and federal employment taxes withheld from employee payroll checks. Yep, sorry to break it to you, but the real problems you face as the principal of a company loom every payroll period.
Regardless of the type of business entity, if a business has employees, those employees almost always have federal taxes (and lots of other taxes and deductions) withheld from their paychecks. The money withheld must be timely paid to the governmental or administrative authority. Federal tax and withheld money must be paid to the IRS. If the money is not timely paid to the feds, the company will incur a severe penalty called the Trust Fund Recovery Penalty. We are used to long government titles being reduced to acronyms or initials, so you would think that this penalty would be called the "TFRP." It's not: It is instead called the "100% Penalty." The penalty is aptly named, because the amount of the penalty assessed can be 100% of the unpaid federal taxes--that's 100% which must be paid in addition to the unpaid taxes and any accrued interest.
"No problem," you might think. "We've been listening to our attorneys: We set up our entity properly; we maintain our records; we keep up our formalities and document our decisions; we clearly define what each of our [officers/partners/members/executives/managers] should do. That means that the entity will be responsible for paying that penalty; the individuals are not personally liable."
And you would be correct--uh, except for that last sentence: When it comes to liability for things like payroll taxes, the federal government may "pierce the limited liability veil" of the entity, and hold the "responsible person" personally liable for the entire penalty amount.
So, who is the "responsible person"? It is the person--or persons--who are responsible for collecting, calculating and paying the funds withheld, and who knowingly or intentionally failed to remit the taxes. When determining if an individual is a responsible person, the courts will not be bound by titles and designations; the courts will look at the actual operations of the entity, the actual activities of the individual, and the amount of control or authority the person possesses.
Of course, you don't want to be in the position of having to explain why you are not a "responsible person." By the time you've reached that point, you have already spent a lot of money on attorney fees, audits and hearings. The best thing you can do is to make sure those withheld funds are accurately calculated and timely paid. Then you can breathe a sigh of relief--at least until the next payroll period.