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Small Business Owners and Payroll Taxes

If you own a small business, you know you have to be careful about payroll taxes and other tax-related aspects of your company. Even if someone else handles the payroll taxes, it is possible for the business owner to be held personally liable if those taxes are not paid to the Social Security trust fund.

When this happens, it can also result in a substantial tax penalty.

A federal appeals court recently reaffirmed the authority of the IRS to hold a company owner personally liable for unpaid payroll taxes. In Jenkins v. U.S., the U.S. Court of Appeals for the Federal Court ruled that a majority owner could be held responsible for those taxes, even if someone else handled the day-to-day administration of the payroll.

Timothy Jenkins was a magazine co-owner and publisher who had both invested money in the business and lent it money. After ousting his partner in a business dispute, Jenkins wrote a series of company checks to himself. He knew payroll taxes had not been paid, but took the position that the checks were repayment for the loans he made to the company.

The IRS did not agree with this characterization of the payments and levied on Jenkins' retirement account, as well as on Social Security benefits. Jenkins sued, but the Federal Court of Claims held for the IRS. The federal appeals court upheld that decision.

Jenkins had argued that he was not personally liable for the payroll taxes because he did not handle those payments on a regular basis. The court pointed out, however, that he had the power to do so. The checks he wrote to himself, trying to recapture his investment, were evidence of this.

Source: "CEO Personally Liable For Company Payroll Taxes," Forbes, Robert W. Wood, 6-29-12

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