The importance of paying payroll taxes

Federal law mandates that business owners withhold and submit payroll taxes to the IRS or risk facing certain consequences.

Whether running a small business or a large corporation, employers are subject to certain laws that regulate how they collect, keep and contribute to federal taxes. In California and across the U.S. employers have responsibilities when it comes to withholding federal taxes from their workers and then submitting those funds to the IRS. Business owners and other employers who fail to follow these requirements may be subject to serious penalties, which may even include jail time.

Case in point

In one case, a business owner outsourced his payroll and accounting tasks to a third-party. This manager he appointed was responsible for taking the federal taxes out of employees' payroll checks and submitting the payroll taxes to the federal government. According to Forbes, the owner alleged that he was unaware that the manager was not compliant in these tasks and had failed to pay the federal taxes. Despite the business owner's protests, the court held him personally liable for the wrongdoing saying that he should have been aware of where the withheld tax money was going.

Strict penalties

Although the business owner is this case may not have known that the manager he hired was not paying federal payroll taxes, there are instances where owners may intentionally with-hold money from the government. The Journal of Accountancy reported that business owners may be required to repay the federal taxes that they had failed to submit as part of their penalty. Furthermore, the fees cannot be discharged in a bankruptcy situation.

If it is established that the business owner evaded paying payroll taxes on purpose and with intent, he or she could face felony criminal charges. This may involve at least five years of prison time and up to $10,000 in fines.

Who is responsible?

Depending on the circumstances surrounding the case, the company itself may be penalized and/or the responsible party may be held liable. The person who has the authority to disperse funds, sign payroll checks, manage the company's operations, prepare tax returns or organize human resources may be seen as the responsible party. If an employee, who is not the owner of the company, plays a role in the evasion of payroll taxes, he or she is generally not held liable.

Finding legal assistance

As a California business owner, you want to make sure that your rights are being upheld in court. The laws surrounding federal payroll taxes may be difficult to understand, and it may help to seek the counsel of an experienced tax attorney.