Unpaid Payroll Taxes and the Trust Fund Recovery Penalty
A payroll tax debt has two layers. Income tax withheld from pay and the employee share of Social Security and Medicare are trust fund taxes. When the business cannot pay them, 26 U.S.C. § 6672 lets the IRS charge each responsible person who acted willfully a penalty equal to 100% of the unpaid trust fund amount.
This guide covers a business behind on federal employment taxes: what counts as payroll tax, deposits and penalties, collection, how the trust fund recovery penalty (TFRP) reaches individuals, outsourcing, and 2026 payment routes. For a proposal letter already in hand, see the Letter 1153 guide.
Deadline to know: The IRS TFRP page allows 60 days from the date of the proposal letter to appeal (75 days if addressed outside the United States). Section 6672(b)(2) requires that notice at least 60 days before any notice and demand for the penalty.
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What payroll tax is, and which part belongs to employees
Publication 594 counts withheld income tax, both shares of Social Security and Medicare, and federal unemployment tax as employment taxes. Sections 3402(a) and 3102 require employers to withhold income tax and the employee’s FICA, and § 3102(b) makes the employer liable for the FICA. Section 7501(a) treats withheld tax as held in trust for the United States; § 7501(b) points to the civil penalty in § 6672 and the crime in § 7202.
| Payroll tax item (2026 rates, Publication 15) | Trust fund tax? |
|---|---|
| Federal income tax withheld | Yes |
| Employee Social Security, 6.2% on wages up to $184,500 | Yes |
| Employee Medicare, 1.45%, plus 0.9% Additional Medicare Tax withheld above $200,000 | Yes (withheld Medicare) |
| Employer’s matching Social Security and Medicare | No |
| FUTA, paid only by the employer | No |
The TFRP reaches only the “Yes” rows; the business owes all of them.
Deposit schedules and the failure-to-deposit penalty
Publication 15 (2026) requires deposits by electronic funds transfer. For 2026 Form 941 filers, the schedule depends on taxes reported from July 1, 2024, through June 30, 2025:
- Monthly ($50,000 or less, and new employers in their first calendar year): by the 15th of the next month.
- Semiweekly (more than $50,000): Wednesday to Friday paydays by the next Wednesday; Saturday to Tuesday paydays by the next Friday.
- $100,000 or more accumulated in a day: due the next business day on either schedule.
- Under $2,500 for the current or prior quarter (with no $100,000 day): may be paid with a timely return.
The IRS penalty page covers deposits that are late, short or made the wrong way. Section 6656 sets the rates, counted in calendar days:
| Deposit status | Penalty |
|---|---|
| 1 to 5 days late | 2% |
| 6 to 15 days late | 5% |
| More than 15 days late, or paid directly to the IRS instead of deposited (Publication 15) | 10% |
| More than 10 days after the first notice (such as CP220), or on a demand for immediate payment (such as CP504J) | 15% |
The tiers replace each other rather than adding up, and interest is charged on them. Relief routes include reasonable cause, a § 6656(c) waiver for an inadvertent first-quarter miss by a timely filer within net worth limits, and § 6656(e), which allows designating deposit periods within 90 days of a penalty notice.
Returns. Form 941 is due the last day of the month after each quarter, and Form 940 by January 31. Publication 15 lists a failure-to-file penalty of 5% of unpaid tax per whole or part month and a failure-to-pay penalty of 0.5% a month, each generally capped at 25%.
How the IRS collects from the business
For unpaid employment taxes, Publication 594 lists the deposit penalty of up to 15%, a lien notice or levy, a proposed TFRP against the people responsible, and possible referral to the Department of Justice for civil collection or criminal prosecution.
- Lien. See federal tax lien.
- Levy. Seizure normally follows a final notice sent at least 30 days ahead, but a Disqualified Employment Tax Levy can come first if the business requested a Collection Due Process appeal on employment taxes for other periods within the past 2 years. See IRS bank levy.
- Special trust account. Publication 15 says the IRS may order deposits into a special trust account by written notice, and that noncompliance can bring criminal penalties.
For the general bill sequence, see back taxes.
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How the trust fund recovery penalty reaches individuals
IRM 5.7.3 calls the TFRP “an additional means of collecting” trust fund taxes the business cannot fully pay. The IRS computes it from unpaid withheld income tax plus the employee’s portion of FICA, so the employer’s match is excluded, and the business need not have closed.
Responsible. Someone with the duty and power to direct collecting, accounting for and paying the taxes. The TFRP page lists corporate officers and employees, partnership members and employees, directors, shareholders, nonprofit trustees, anyone controlling disbursements, third-party payers including payroll service providers and PEOs, and people within them or the client. An employee who only paid bills as a superior directed is not responsible.
Willful. The person knew or should have known of the unpaid taxes and intentionally disregarded the law or was plainly indifferent, with no bad motive needed. The IRS treats paying other creditors instead as “an indication of willfulness,” and Notice 784 says paying net payroll instead is willful.
- Interview. A revenue officer records a Form 4180 interview, in person or by phone, and may summons the person to attend (IRM 5.7.4.2.4).
- Proposal. Letter 1153 arrives with Form 2751; the Letter 1153 guide covers responses and appeals.
- Assessment. With no response, the IRS assesses, sends a Notice and Demand for Payment, and can file a lien or levy personal assets.
The individual owes interest on the penalty unless the business also paid its interest in full (IRM 5.7.7.4). Each person is assessed separately per quarter and the amount is not divided, so the full penalty can be collected from any one of them (IRM 8.25.1.4.1). Under § 6672(d), a person who paid more than a proportionate share can recover the excess from the others, but only in a separate suit.
The IRS passport page counts trust fund recovery penalties toward a seriously delinquent tax debt under § 7345, more than $66,000 for 2026 (see passport revocation). Because the penalty is divisible (IRM 8.25.1), a refund claim needs only one employee’s share paid for each period, with a separate Form 843 per period.
Payroll companies, PEOs and reporting agents
Publication 15 says an employer that outsources payroll generally stays liable for the taxes if the provider fails, and the IRS outsourcing page says the employer “may also be held personally liable for certain unpaid federal taxes.”
- Payroll service providers and reporting agents are not liable as employer or agent for the client’s employment taxes, per Publication 15. The TFRP page still lists providers and their staff as possible responsible persons, and IRM 5.7.3.4.3 says each such case must stand on its own facts.
- Certified PEOs are generally treated as the employer for wages they pay under a CPEO contract, though the client may also be an employer for certain workers.
- Checks the IRS names: keep the business as the address of record and use the EFTPS Inquiry PIN to confirm deposits.
If a provider fails, IRM 5.7.3.4.3 weighs what the client knew, whether the provider hid the problem by fraud, prior IRS notices, and how the client responded.
Payment options for a business that owes payroll tax
Simple Payment Plan (Business Trust Fund). IRM 5.14.5, revised July 21, 2026, replaced the In-Business Trust Fund Express agreement with this plan and removed its 24-month payoff rule. As of October 2026, irs.gov lists $25,000 or less in assessed tax, penalties and interest for a business with trust fund taxes. Filing and deposits must be current, and the balance may be paid down before approval but not with the first installment. The plan must pay in full by the collection statute expiration date; irs.gov says most taxpayers have up to 10 years. Businesses cannot apply online; they call 800-829-4933 or the number on the notice.
The sources differ here. irs.gov says these plans need no TFRP determination; IRM 5.14.5.4 skips it only if the balance is $25,000 or less, the plan pays in full by the expiration date, and it is granted within 120 calendar days of case assignment. It is not granted with a levy release request or a request made solely to delay.
Larger balances. IRM 5.14.7 expects the business to cover operating expenses and current taxes, with a financial analysis (Form 433-B). The TFRP is considered first, and officers may be asked to sign Form 2750 extending the assessment period; they may refuse, but refusal can lead to assessment if the penalty is collectible. See installment agreements.
Designating payments. IRM 5.7.4.4 requires a designation to be voluntary, specific, written and made with the payment; a note saying only “trust fund,” with no periods, does not qualify. Undesignated money usually goes to the period with the earliest collection expiration date, and installment payments cannot be designated (IRM 5.14.7.5). Publication 594 says paying the trust fund taxes personally avoids a TFRP assessment.
Currently not collectible. IRM 5.16.1 lets an operating corporation or LLC be reported currently not collectible when it can pay current taxes but not back taxes and has nothing to levy, provided it stays current. The debt remains, penalties and interest accrue, and a lien may be filed.
When an attorney matters
Publication 594 lets an attorney, CPA or enrolled agent, among others, represent a business in collection on Form 2848. The roles diverge in a few places:
- Criminal exposure. Section 7202 makes willful failure to collect or pay over tax a felony punishable by a fine of up to $10,000, up to 5 years in prison, or both. Section 7525 privilege for CPAs and enrolled agents covers only noncriminal matters. See IRS criminal investigation.
- Federal court. Publication 5 says some employment tax cases can be heard only in a U.S. District Court or the Court of Federal Claims.
Related guides
Frequently Asked Questions
What is the trust fund recovery penalty?
A civil penalty under 26 U.S.C. § 6672 equal to unpaid trust fund taxes, assessed against each responsible person who acted willfully when the business cannot pay.
Is the employer’s share of payroll tax part of the penalty?
No. The IRS computes it from withheld income tax plus the employee’s portion of FICA. The employer’s matching tax and FUTA stay debts of the business.
Does using a payroll company protect the business owner?
Generally not. Publication 15 says the employer stays liable if the provider fails; a certified PEO is the main exception, for wages it pays under a CPEO contract.
Can a business get an IRS payment plan for unpaid payroll taxes?
Yes. As of October 2026, irs.gov lists a Simple Payment Plan for businesses owing $25,000 or less with trust fund taxes, if filing and deposits are current. Larger balances need a financial analysis.
Can the IRS collect the same penalty from several people?
It can collect the full amount from any one responsible person, but the total only once. Section 6672(d) lets someone who paid more than a proportionate share sue the others for the excess in a separate case.
Talk through a payroll tax debt
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Ray Neu
Ray Neu is the publisher of IRSAttorneys.net. A former law enforcement officer with a background in criminal justice and digital publishing, he oversees editorial direction, partnership standards, and compliance review for the site. He is not an attorney and does not provide legal advice; all tax law content is sourced and reviewed against the standards documented on the Editorial Team & Standards page.
Sources
- 26 U.S.C. § 6672
- 26 U.S.C. § 7501
- 26 U.S.C. § 6656
- 26 U.S.C. § 3102
- 26 U.S.C. § 3402
- 26 U.S.C. § 7202
- 26 U.S.C. § 7345
- 26 U.S.C. § 7525
- IRS: Employment taxes and the trust fund recovery penalty
- IRS: Trust fund taxes
- IRS: Failure to deposit penalty
- IRS: Outsourcing payroll duties
- IRS: Simple Payment Plans for individuals and businesses
- IRS: Online payment agreement
- IRS: Payment plans
- IRS: Currently not collectible
- IRS: Passports and unpaid taxes
- IRS Publication 15 (2026)
- IRS Publication 594
- IRS Publication 5
- IRS Notice 784
- IRM 5.7.3
- IRM 5.7.4
- IRM 5.7.7
- IRM 8.25.1
- IRM 5.14.5
- IRM 5.14.7
- IRM 5.16.1
- IRS: Form 843
- IRS: Form 2848
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