If you own a small business that is organized as a corporation or limited liability company you probably understand that you are generally not personally responsible for the business debts unless you agree to be responsible (for example, personal guarantees).   However, one exception to the rule is personal liability for payroll taxes that should have been paid to the IRS.  Unfortunately, as small businesses experience financial problems often the funds are used to pay the rent and keep the lights on rather than paying Uncle Sam.  In these situations, the IRS will often go after individuals for these “trust fund taxes.”  The Internal Revenue Code imposes personal liability on “responsible persons,” including officers and agents of an employer, who are (1) responsible for “the employer’s decisions regarding withholding and payment of the taxes” and (2) who willfully fail to see that the taxes are paid.

The list of potentially responsibly persons is not limited to the owner or manager who signs the checks.  For example, I once met with a director of a small non-profit private school that had not been paying its payroll taxes.  If the board of directors makes the decision to keep the school open until the end of the school year, knowing that the payroll taxes will not be paid, the individual members of the board of directors, in addition to the administrators, may be liable for the taxes.  If your business is not generating enough income to pay payroll taxes (or sales or other taxes), it is probably time to consider shutting down the business.  Losing a business and income is bad, but losing the business and income, and being personally liable for business taxes (non-dischargeable in most personal bankruptcy cases), is much worse.