One of the most laborious tasks for small businesses is managing payroll. It’s critical you not only withhold the right amount of taxes from employees’ paychecks, but also that you pay them over to the federal government on time.

a teal sticky note with the words "sign here" on top of a tax withholding document; for a blog post about payroll tax penalty for small businesses

If you willfully fail to do so, you could personally be hit with the Trust Fund Recovery Penalty, also known as the 100% penalty. The penalty applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages. Since the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over.

The reason the penalty is sometimes called the “100% penalty” is because the person liable for the taxes (called the “responsible person”) can be personally penalized 100% of the taxes due. Accordingly, the amounts the IRS seeks when the penalty is applied are usually substantial, and the IRS is aggressive in enforcing it.


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