All too often, the people who come to my office are focused on what they owe the IRS. What often gets overlooked – to their chagrin, usually – is that the IRS is often not the only player. Payroll taxes are a prime example.

Google “Trust Fund Penalty” and you’ll turn up dozens, if not hundreds of articles telling you that the IRS can assess payroll taxes personally against any ‘responsible person.’ And not only can they, they will.

But….

The IRS can only really whack you for the ‘trust fund’ portion of the tax – that is, the part that you deducted from your employees paychecks. That’s the portion for which you’ll be personally assessed – the non-‘trust fund’ portion won’t be personally assessed.

On the other hand, California – like other states – is much more aggressive. Under Section 1735 of the California Unemployemnt Insurance Code, California will assess the full amount of the tax against you personally:

1735. Any officer, major stockholder, or other person, having charge of the affairs of a corporate, association, registered limited liability partnership or foreign limited liability partnership, or limited liability company employing unit, who willfully fails to pay contributions required by this division or withholdings required by Division 6 (commencing with Section 13000) on the date on which they become delinquent, shall be personally liable for the amount of the contributions, withholdings, penalties, and interest due and unpaid by such employing unit. The director may assess such officer, stockholder, or other person for the amount of such contributions, withholdings, penalties, and interest….

Notice the language that’s highlighted – it doesn’t limit personal liability to amounts withheld. It includes contributions, or, in plain English, the amount paid by the employer and not withheld from the employee. What does that include? Well, state tax is a withholding, as is state disability insurance (SDI, or VSDI or something similar – it’s in Box 14 of your W2). So what’s contributed by the employer? Unemployment (remember where we found this?). Employment training tax (though, in reality, it’s a small amount; the bigger issue is unemployment).

Lest you think that this is something that goes away at death, think again. Section 1090 of the CUIC requires administrators or executors to notify the State of their name and address, and subjects them to all the benefits – and liabilities – of the deceased’s position. Think you can get around this by not notifying the state? Yep, they thought of that too – see Section 1736. (NOTE: the Feds can also pursue executors/administrators, so if you’re an executor, don’t ignore payroll taxes!)

So while the Feds hit you for the taxes your company withholds from its employees, they don’t pursue you for the company’s contribution. California, on the other hand, does. In other words, forgetting about the state when formulating a controversy strategy can be a very costly oversight, indeed.

Have a payroll tax issue? Contact our office for help – (818) 480-3280 or (626) 708-1040.