Can payroll or employment tax liability be discharged in bankruptcy? It depends.
Payroll or employment taxes are comprised of two parts:
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- the employer portion, and
- the employee portion.
Employer Portion of Payroll Taxes is Dischargeable – Sometimes.
The employer portion of the payroll tax is the tax which the employer owes directly to the IRS. The employer portion includes the employer’s obligation to match the employee’s 6.2% social security tax and the 1.45% Medicare tax.
The employer portion of the employment tax can be discharged in bankruptcy if:
- there are more than three years between the date the 941 tax return was last due, including extensions, and the date that the bankruptcy was filed;
- there are more than two years between the date the 941 tax return was filed and the date the bankruptcy case was filed; and
- the employer did not willfully evade payment of the tax.
Employee (Trust Fund) Portion of Payroll Taxes is Never Dischargeable.
The employer is required to withhold the employee portion aka “trust fund” portion from the employee’s pay check and remit it to the Internal Revenue Service (IRS).
The employee portion of the tax is referred to as a trust fund tax because the employer is collecting the employee paid portion of the payroll tax from the employee in the capacity of a trustee for the IRS.
The employee paid portion of the payroll tax includes the 6.2% Social Security tax and the 1.45% Medicare tax.
Trust fund taxes are never dischargeable in Chapter 7 bankruptcy.
And in Chapter 13 bankruptcy, the plan must provide for full payment of all trust fund recovery taxes in order to be confirmed.
There is no escape from trust fund recovery taxes. However, trust fund taxes will become uncollectible if the 10 year statute of limitations expires without the IRS filing suit, regardless of whether the taxpayer files bankruptcy or not.
If you would like to speak with a knowledgeable attorney regarding payroll taxes and bankruptcy, contact me today to schedule a FREE initial consultation. Just fill out the Contact Dan form on the far right side of the page and click the Submit button and I’ll get back with you as quickly as I can. Or just pick up the phone and give me a call at 918-615-8260. I’ll answer all of your questions in plain English so that you’ll have the information you need to make the decisions that will help you the most.
