The Problem With 941 Tax Liabilities

As a tax attorney, I have seen many businesses accrue 941 employment tax liabilities. Generally, what occurs is a business experiences cash flow issues and must make payroll. The employer has enough funds to issue net payroll checks but not enough to remit the federal tax deposits for withheld Social Security, Medicare, and federal income tax to the IRS.

As a result, employees are paid, but the IRS is not — and this creates serious problems for business owners in Columbus, Ohio (OH) and throughout the country.

What Are 941 Taxes?

941 taxes are federal employment taxes withheld from an employee’s paycheck.

For example, if an employee earns a gross payroll check of $2,000, the net paycheck may be closer to $1,500 after employment taxes are withheld. The withheld portion — including Social Security, Medicare, and federal income tax — must be deposited with the IRS.

Why Are 941 Tax Debts Problematic?

1. The Debt Accumulates Quickly

941 tax liabilities can grow rapidly. For example, if an employer has 10 employees and fails to remit $500 per employee in federal employment taxes, the liability equals $5,000 per payroll period. Over multiple payroll cycles, the debt can escalate quickly.

2. The IRS May Take Aggressive Collection Action

Once 941 taxes are owed, the IRS may:

• File a Notice of Federal Tax Lien
• Issue bank levies
• Seize business assets
• If the debt is not resolved or placed under an agreement, enforcement action is likely.

3. Personal Liability: The Trust Fund Recovery Penalty

Perhaps the most serious issue is that the IRS may personally assess one or more individuals within the business for a portion of the 941 tax debt.

This portion is called the Trust Fund Recovery Penalty (TFRP).

This means that in addition to the business owing taxes, the individual business owner (or other responsible persons) may also owe part of the same tax debt personally. The IRS may then pursue collection actions against the individual, including:

• Filing personal tax liens
• Issuing bank levies
• Garnishing wages
• Seizing assets

What Is the 941 Trust Fund Amount?

The trust fund amount consists of the federal taxes withheld from employee paychecks:

• Social Security tax withheld
• Medicare tax withheld
• Federal income tax withheld

For example:

If an employee earns $10,000 and $750 is withheld for Social Security and Medicare and $1,000 is withheld for federal income tax, the trust fund amount is $1,750.

It is important to note that the employer’s matching portion of Social Security and Medicare tax is not part of the trust fund amount, because it is not withheld from the employee’s wages.

How Is the Trust Fund Amount Assessed to an Individual?

The IRS conducts a 4180 Interview to determine who was “willful and responsible” for failing to pay the 941 taxes.

During this process:

• The IRS evaluates who had authority within the company
• The IRS determines who knew or should have known that taxes were unpaid
• The IRS proposes personal assessment against those deemed responsible

An individual has 60 days to protest the proposed assessment.

If the assessment is not successfully protested, the individual becomes personally liable for the trust fund amount. The IRS may collect the full trust fund amount from any assessed individual, even if multiple individuals were assessed.

Does the IRS Collect Both the 941 Debt and the Trust Fund Amount?

The answer is both yes and no.

The trust fund amount is a portion of the overall 941 liability. If the trust fund portion is paid, it reduces the business’s total 941 tax debt.

For example: If a business owes $250,000 in 941 taxes and $150,000 represents the trust fund amount, payment of the $150,000 reduces the remaining liability to $100,000.

Although the IRS may collect from both the business and responsible individuals, it does not collect the entire business debt and the entire trust fund amount separately, as they represent the same underlying tax.

Speak With a Columbus, Ohio Tax Attorney About 941 Tax Debt

If your business owes 941 employment taxes, it is strongly recommended that you seek assistance from a qualified tax attorney.

941 tax liabilities involve multiple layers of potential exposure — including personal liability through the Trust Fund Recovery Penalty. A tax attorney experienced in resolving employment tax matters can help address the moving pieces and work toward a resolution.

You can contact The McGuire Law Firm to speak with a Columbus tax attorney serving businesses throughout Ohio (OH) with 941 tax issues and IRS collection matters.