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Small business alert: The IRS can hold you personally liable with the 100% penalty

Some tax mistakes can be costly—but one of the most serious is not turning over the federal income and payroll taxes you’ve withheld from your employees’ paychecks. If your business fails to do this, the IRS can hold you personally responsible, even if you’re not the owner.

This is done through something called the Trust Fund Recovery Penalty, also known as the 100% penalty.

What is the 100% penalty?

If your business withholds taxes from employees’ paychecks but doesn’t send that money to the IRS, the government views it as stealing from employees and the federal treasury. Because of that, the IRS doesn’t just go after the business—it can go after the people in charge and make them pay the full amount out of their own pocket.

That’s why it’s called the 100% penalty: the IRS can assess 100% of the unpaid taxes against one or more individuals it considers responsible.

Who could be held personally responsible?

This penalty doesn’t just apply to business owners. Anyone who plays a role in handling the company’s finances could be considered a “responsible person,” including:

• Corporate officers or directors

• Shareholders

• Partners in a partnership

• LLC members

• Employees with financial duties, such as managing payroll or signing checks

To be held personally liable, the IRS must believe the person:

1. Was responsible for collecting, managing, and paying the withheld taxes, and

2. Willfully failed to pay them.

“Willfully” doesn’t mean there was malicious intent—it just means the person knew the taxes weren’t paid and chose not to fix it.

Having the authority to sign checks or access the business bank account isn’t enough by itself. The IRS looks at the bigger picture: who had control or influence over financial decisions?

How the IRS (and courts) decide who’s responsible

The IRS and courts consider several factors when deciding if someone is a “responsible person.” These include whether the individual:

• Is an officer, director, or key decision-maker

• Owns shares or has a financial stake in the business

• Has authority over daily operations or hiring/firing

• Can decide which bills or debts get paid (and when)

• Manages the business’s bank accounts and financial records

If you’re involved in these areas, even if you’re not the owner, you could be at risk.

Real-world examples: Who’s really at risk?

To understand how this plays out in real life, here are a few actual cases where individuals were hit with the 100% penalty:

Case 1: Executor of an Estate

An inn, which was part of someone’s estate, didn’t pay the taxes withheld from employee paychecks. Even though the executor didn’t directly run the business, they controlled the estate’s assets. Because they failed to make sure the taxes were paid, the IRS held the executor personally responsible for the unpaid amount.

Case 2: Volunteer Board Member at a Nonprofit

A volunteer trustee for a charitable organization found out the nonprofit hadn’t paid over payroll taxes. Since they had the power to decide what got paid and when, the IRS said they had a duty to act—and didn’t. Even though they weren’t paid for their role, the IRS considered them a responsible person and hit them with the 100% penalty.

Case 3: A New CFO and the CEO

A newly hired CFO discovered the company was several years behind on paying withheld payroll taxes. He told the CEO, and together they alerted the board of directors. Despite having enough money to pay the taxes, no action was taken. The IRS later assessed the 100% penalty against both the CFO and the CEO—even though they had only been in charge for a short time. A federal court agreed, finding they had the authority to pay the taxes but chose to pay other bills instead. That decision made them personally liable.

How to protect yourself

If you’re involved in a business and have any role in handling money, payroll, or financial decisions, it’s crucial to understand the risks.

The IRS can come after you personally—even if you didn’t think it was your job to handle taxes. Defending yourself in these cases can be expensive and stressful.

To protect yourself:

• Make sure all withheld payroll taxes are sent to the IRS on time

• Keep clear records of who is responsible for tax payments

• If you discover a problem, take action quickly—don’t ignore it

• Talk to a qualified tax advisor to understand your role and responsibilities

Bottom line

The 100% penalty is one of the most serious actions the IRS can take against individuals in a business. If you’re a small business owner, manager, or financial employee, make sure you understand your responsibilities and protect yourself from personal liability.

The post Small business alert: The IRS can hold you personally liable with the 100% penalty appeared first on Padgett Advisors.