It’s common to delay tax payments when money is tight. For instance, a struggling real estate agent might miss a quarterly estimated tax payment, or a small business may be tempted to skip a payroll tax payment. However, missed payroll tax payments can quickly snowball with penalties and interest. For instance, the IRS can hold a responsible party personally liable for payroll taxes and assess the Trust Fund Recovery Penalty which is equal to 100% of the withheld employee portion of payroll taxes. When payroll tax liability becomes too great to bear, some small businesses and individuals consider filing bankruptcy.
Does Bankruptcy Eliminate Payroll Tax Debt?
No. Chapter 7 and Chapter 13 bankruptcy do not eliminate payroll tax debt. Payroll taxes withheld by an employer are considered withholding tax claims and are non-dischargeable in bankruptcy. (11 USC 523(a)(1)(A)).
How Can You Resolve Payroll Tax Debt?
Since bankruptcy will not help, businesses and individuals with payroll tax liability need to consider other tax resolution options. An experienced tax attorney can help clients secure an installment agreement with the IRS and EDD. Likewise, a tax attorney can pursue an offer in compromise or a hardship letter.