Payroll taxes: the “loan” that lives forever

23 Jun Payroll taxes: the “loan” that lives forever

My client’s business corporation is long dead and he’s back to working for others. But six quarters of unpaid corporate payroll taxes not only become his personal debt, but a tax that is never dischargeable in bankruptcy and a priority claim which must be paid in his Chapter 13 case.

It is so tempting for the small business person: pay the employees their take home pay, and put off paying the IRS the money withheld from the employee’s check . The business gets a little extra cash flow, without having to arrange a loan. Only the IRS sees it as theft.

The IRS will give the employee credit for the income tax withheld from his check, whether or not the employer ever actually sends that part of his earnings to the IRS. The IRS puts the onus on the employer who used that money to keep the business afloat. When the employer is a corporation, the law makes anyone who could sign a check on the corporation’s account potentially responsible for those missing funds.

Small business folks are the most energetic, optimistic, tenacious people around. They find it tempting to put off settling up with the IRS. They forget that something like 9 out of every 10 small businesses fail within 5 years, but the tax burden for payroll taxes lives on.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.

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