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Yes. If your business stops paying payroll taxes, the IRS and California’s EDD can both come after you personally. The IRS uses the Trust Fund Recovery Penalty under Internal Revenue Code § 6672 to collect unpaid employee withholdings from owners, officers, and anyone else who controlled payment and chose not to pay. California’s EDD has its own rule, Unemployment Insurance Code § 1735, which can reach further, covering penalties and interest as well as the tax itself.

Forming a corporation or an LLC protects you from many business debts. Payroll taxes are the big exception. This guide explains who counts as “responsible,” what the IRS and EDD must prove, how the two systems differ, and what to do if you receive an interview request or a proposed assessment.

When you pay employees, part of every paycheck never belongs to the business. You withhold federal income tax and the employee’s share of Social Security and Medicare, and you hold that money for the government. The law calls these “trust fund” taxes because the employer is holding them in trust.

That is why using withheld payroll taxes to cover rent, inventory, or a vendor bill is treated so seriously. In the government’s view, the business spent money that was never its own. The employee has already been credited with the tax, so the Treasury is out the money unless it collects from someone.

California applies the same logic to state payroll taxes. Employers withhold State Disability Insurance (SDI) and California personal income tax from wages, and also owe their own Unemployment Insurance (UI) and Employment Training Tax (ETT) contributions.

The Trust Fund Recovery Penalty (TFRP) lets the IRS assess the unpaid trust fund portion of a business’s payroll taxes against individuals. It is often called the “100% penalty” because it equals the full amount of trust fund tax the business failed to pay.

The penalty covers:

• federal income tax withheld from employees’ wages, and
• the employee’s share of Social Security and Medicare (FICA) tax.

It does not cover the employer’s matching share of FICA, or penalties and interest owed by the business. Those remain debts of the business.

Two details surprise many owners. First, the business does not have to be closed. The IRS can assess the TFRP against individuals whenever the trust fund taxes cannot be collected promptly from the business itself. Second, the IRS can assess the full amount against every person it finds responsible. In practice, it will not collect more than the total owed, but it can pursue whichever responsible person is easiest to collect from.

A responsible person is anyone with the duty and the authority to collect, account for, or pay the business’s trust fund taxes. Job titles matter less than actual control. The IRS looks at who could decide which bills got paid.

People commonly found responsible include:

• owners, shareholders and partners who run the business
• corporate officers, such as the president, CEO, or CFO
• directors who are involved in financial decisions
• employees with authority to sign checks or approve payments
• in some cases, a payroll service provider or other third-party payer

Signature authority on the bank account is strong evidence, but it is not enough on its own. A bookkeeper who signs checks only on the owner’s instructions may not be responsible. A silent co-owner who never touched the finances may not be either. An owner who delegated payroll to a manager usually still is, because the authority to pay never really left them.

The IRS must also show the failure was willful. Willful does not require bad intent or a plan to cheat the government. It generally means you knew, or recklessly disregarded, that the payroll taxes were unpaid, and you used available funds to pay other creditors instead.

The classic example: a business falls behind, the owner learns payroll deposits were missed, and over the next few months the owner keeps paying employees, the landlord, and suppliers to stay open.

Each of those payments, made while the IRS went unpaid, can be evidence of willfulness. Courts have repeatedly held that paying net wages while skipping the tax on those wages is a choice to prefer other creditors.

Willfulness is often the most contestable part of a case. A person who truly did not know about the shortfall, and could not reasonably have known, has a real defense. So does someone who learned of the problem only after the money was gone and had no unencumbered funds left to pay.

The process usually follows a predictable path:

1. The business falls behind. The IRS sends notices about unpaid employment taxes, typically on Form 941 periods.
2. A revenue officer is assigned. If collection from the business stalls, an IRS revenue officer opens a trust fund investigation.
3. Form 4180 interviews. The revenue officer interviews each potentially responsible person and records the answers on Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty. The questions cover your role, bank signature authority, who made payment decisions, and when you learned taxes were unpaid.
4. Letter 1153 and Form 2751. If the IRS decides you are responsible and willful, it mails Letter 1153 proposing the penalty, usually with Form 2751, Proposed Assessment of Trust Fund Recovery Penalty.
5. Protest or assessment. You generally have 60 days from the date of Letter 1153 to file a written protest with the IRS Independent Office of Appeals (75 days if the letter is addressed outside the United States). If you do nothing, the IRS assesses the penalty and begins collection.

The Form 4180 interview is the most important moment in the case. It creates the record the IRS relies on later, and answers given casually can be very hard to undo. You are entitled to be represented, and many tax attorneys recommend that a representative attend or handle the interview.

Signing Form 2751 means you agree to the assessment. Do not sign it just to make the problem go away. Once assessed, the IRS can file liens against your property, levy your bank accounts, and garnish your wages, just as it would for your personal income tax.

California Unemployment Insurance Code § 1735 allows the EDD to assess unpaid state payroll taxes against individuals. It applies to any officer, major stockholder, or other person having charge of the affairs of a corporation, association, limited liability company, or registered or foreign limited liability partnership, who willfully fails to pay required contributions or withholdings when they become delinquent.

The elements will sound familiar: control over the business’s affairs, plus a willful failure to pay. The consequences, however, go further than the federal rule. Under § 1735, the responsible person becomes personally liable for the contributions, withholdings, penalties, and interest.

That difference matters. The IRS penalty is limited to the trust fund portion. The EDD can pursue the employer’s own UI and ETT contributions, the withheld SDI and state income tax, and the penalties and interest that have built up on top.

The EDD has the same collection tools against you that it has against the business, including liens, bank levies, and earnings withholding orders. Dissolving or abandoning the company does not end your personal exposure.

Many California businesses that fall behind on payroll owe both agencies at once. That means a single set of decisions about which bills to pay can produce two personal assessments, under two different rules, with two different deadlines.

Consider a Los Angeles restaurant group with two co-owners. Sales drop, and over three quarters the business withholds payroll taxes from employees but deposits none of them. One owner handles finances and signs all checks. The other runs the kitchen and never sees the bank statements.

The IRS will likely find the finance owner responsible and willful, especially if they kept paying suppliers and rent after learning deposits were missed. The kitchen owner has a stronger argument, but their share of ownership and their title will still draw scrutiny.

The EDD can pursue the finance owner for the state payroll taxes, plus penalties and interest. Even after the restaurants close, both personal assessments survive.

This is why the facts gathered early, such as who could sign, who saw which reports, and when each person learned of the shortfall, so often decide the outcome.

Often, yes. The strongest options depend on the stage of the case.

Before an assessment:

• Prepare carefully for the Form 4180 interview, ideally with representation.
• Gather records showing your actual role, such as bank signature cards, emails, and internal approval policies.
• File a timely protest to IRS Appeals after receiving Letter 1153, or a timely petition after an EDD assessment.

Common defenses:

• You lacked real authority over which bills were paid.
• You did not know about the unpaid taxes and had no reason to know.
• Once you learned of the problem, no unencumbered funds were available to pay.
• The IRS or EDD miscalculated the periods or amounts.

After an assessment:

• Negotiate an installment agreement or another collection alternative.
• Explore an Offer in Compromise with the IRS, or the EDD’s own settlement options, if you cannot pay in full.
• Seek contribution from other responsible persons. Federal law gives a person who pays more than their share of the TFRP a right to recover from others who were also liable.

One practical point: if the business is still operating and making payments to the IRS, it can usually designate voluntary payments toward the trust fund portion of the debt. Paying down that portion first reduces the amount that could be assessed against individuals.

Bankruptcy is generally not an escape. Personal liability for trust fund taxes is typically not dischargeable, so planning around the assessment itself usually matters more than planning around bankruptcy.

• Treat payroll taxes as untouchable. Make deposits on time, even when cash is tight. Pay the IRS and EDD before discretionary creditors.
• Watch your payroll provider. Outsourcing payroll does not outsource liability. Check your IRS and EDD accounts regularly to confirm deposits actually posted.
• Act on the first notice. Missed deposits compound quickly with penalties and interest. Early payment plans are easier to negotiate than collection cases.
• Get advice before an interview. If a revenue officer or EDD representative asks to speak with you about unpaid payroll taxes, speak with a tax professional first.

1. Can I be personally liable for payroll taxes if my business is an LLC or corporation?

Yes. Both the IRS TFRP and EDD § 1735 apply to corporations and LLCs. The entity’s liability shield does not protect against unpaid payroll taxes when you were responsible and acted willfully.

2. Does the IRS have to close my business before assessing the TFRP?

No. The IRS can assess the penalty against individuals whenever it cannot promptly collect the trust fund taxes from the business.

3. How long do I have to appeal a proposed TFRP?

Generally, 60 days from the date of Letter 1153, or 75 days if the letter is addressed outside the United States.

4. Is the EDD’s personal liability the same as the IRS penalty?

No. The EDD’s rule can include penalties and interest, as well as the employer’s own contributions. The IRS penalty is limited to the trust fund portion.

5. Can more than one person be held liable for the same payroll taxes?

Yes. Several people can be assessed for the full amount. The agency should not collect more than the total owed, and a person who pays more than their share may seek contribution from the others.

If you have received a Form 4180 interview request, Letter 1153, or a personal assessment from the EDD, the deadlines are short, and the record you build early will shape the result. Leading Tax Group’s team includes tax attorneys who handle EDD, CDTFA, and FTB cases, a former IRS tax auditor, and a former IRS appeals officer. We can review your exposure under both systems and respond before the deadlines run out. Book a free, confidential consultation or call 800-900-4250.