Employers Face Criminal and Civil Liability for Unpaid Payroll Withholding Taxes
Payroll tax issues are among the most aggressively enforced matters handled by the IRS. Employers who fail to remit withheld payroll taxes may face not only business liability, but also personal civil penalties and, in some cases, criminal exposure.
Federal tax laws require employers to withhold income, Social Security, and Medicare taxes from employee wages and remit those funds to the government. When those taxes are withheld but not paid over, the IRS may pursue both the business and certain individuals connected to it for substantial penalties and enforcement actions.
Here’s what employers and business leaders should know.
Employer Obligations to Withhold and Pay Payroll Taxes
Most employers are required to withhold and remit several categories of employment taxes, including:
Federal income taxes
The employee portion of Social Security taxes
The employee portion of Medicare taxes
Employers are also responsible for:
Filing quarterly payroll tax returns, including IRS Form 941
Making timely federal payroll tax deposits
Maintaining accurate payroll and withholding records
These withheld funds are commonly referred to as “trust fund taxes” because employers hold the money in trust for the United States until the taxes are paid to the Treasury.
Consequences of Failing to Pay Withholding Taxes
The IRS aggressively enforces payroll tax compliance because these taxes have already been collected from employees.
Failure to properly report or deposit employment taxes can result in:
Failure-to-deposit penalties
Interest charges
IRS collection actions
Federal tax liens and levies
Personal liability assessments
Civil enforcement actions
Potential criminal investigations
In many cases, the IRS may seek to recover unpaid payroll taxes directly from individuals associated with the business.
The Trust Fund Recovery Penalty (TFRP)
One of the IRS’s most powerful enforcement tools is the Trust Fund Recovery Penalty (TFRP).
Under Internal Revenue Code Section 6672, the IRS can hold certain individuals personally liable for unpaid trust fund taxes. This means the government may pursue individuals directly—even when the employer is a corporation or limited liability entity.
The TFRP generally includes:
Unpaid federal income tax withholding
The employee share of Social Security taxes
The employee share of Medicare taxes
Accrued penalties and interest
The IRS does not need to prove fraudulent intent to assess the penalty.
Who Can Be Held Personally Liable?
The IRS may assess the Trust Fund Recovery Penalty against any “responsible person” who had both:
The duty to collect, account for, or pay payroll taxes; and
The authority to direct how company funds were used
Potential responsible persons may include:
Business owners
Corporate officers and directors
Managing members or partners
CFOs and controllers
Payroll managers
Bookkeepers with financial authority
Third-party payroll providers in some situations
More than one individual can be held responsible for the same unpaid payroll tax liability.
What Makes a Failure “Willful”?
To impose the TFRP, the IRS must determine that the failure to pay was “willful.”
Willfulness does not necessarily require bad intent or fraud. In many cases, the IRS considers whether the responsible person:
Knew, or should have known, that payroll taxes were unpaid; and
Chose to pay other creditors instead of the IRS or showed reckless disregard for payroll tax obligations
For example, continuing to pay vendors, lenders, or employee wages while knowingly failing to remit payroll taxes may support a finding of willfulness.
A common issue arises when financially struggling businesses use withheld payroll taxes to cover operating expenses, vendors, or payroll while intending to “catch up later.” Even when business owners believe the situation is temporary, those decisions can trigger significant IRS scrutiny and potential personal liability.
Criminal Liability for Unpaid Payroll Taxes
Although many payroll tax matters remain civil, criminal enforcement is possible in cases involving:
Intentional failure to collect or pay taxes
Filing false payroll tax returns
Concealing financial records or assets
Repeated payroll tax noncompliance
Fraudulent conduct
Depending on the circumstances, criminal violations may result in substantial fines and imprisonment.
Why Early Legal Guidance Matters
Payroll tax disputes can escalate quickly once the IRS initiates collection efforts or begins investigating potential Trust Fund Recovery Penalty liability. In many cases, business owners and financial decision-makers do not fully appreciate their potential personal exposure until significant penalties have already accrued.
Early legal guidance can be critical when responding to IRS notices, evaluating responsible person allegations, addressing potential willfulness claims, or navigating related civil and criminal tax concerns.
Kundra Law regularly advises businesses, executives, and individuals facing complex federal tax disputes and IRS enforcement matters, including issues involving unpaid payroll withholding taxes and Trust Fund Recovery Penalty investigations.
Originally published in 2021. Updated May 2026.