The Payroll Tax Money in Your Account Was Never Working Capital

When cash is tight, payroll tax money can look like cash available to keep the business moving. But some of it is not the company’s money to use.

Federal income tax and the employee share of Social Security and Medicare taxes withheld from wages are called trust fund taxes. Employers hold these amounts for the Treasury until they are deposited. Using that cash to pay another bill can create personal consequences for the people responsible for the business’s financial decisions.

A recent Tax Court case, Amodio v. Commissioner, T.C. Memo. 2026-96, is a practical reminder. The court upheld a Trust Fund Recovery Penalty against an owner who, after learning the payroll taxes were unpaid, used available company funds for other creditors. The court also limited the amount the IRS could collect from him to the corporation’s remaining employment-tax liability after its accepted offer-in-compromise.

Here are the three questions that matter, and what to consider if your business is behind.

1. Who is responsible?

The Trust Fund Recovery Penalty, or TFRP, can apply to a person who had the authority and responsibility to collect, account for, and pay over trust fund taxes, and who willfully failed to do so.

That can include an owner, officer, director, employee, or another person with meaningful control over business funds. A job title alone does not settle the question. The IRS looks at a person’s actual role and whether they had authority over financial decisions, including which bills got paid.

In Amodio, the owner was treated as a responsible person. The case is also a reminder that an LLC or S-corporation structure does not automatically protect an individual from TFRP liability. The penalty can be assessed against a responsible person personally.

Responsibility can depend on the facts. A payroll provider or another person may have a role, but hiring someone to handle payroll does not automatically remove the employer’s own obligations. The IRS explains who may be responsible for the TFRP.

2. What triggered willfulness?

“Willful” does not require bad motive or an intent to defraud the government. In this context, it can mean that a responsible person knew, or should have known, the taxes were unpaid and chose to pay other creditors with available funds instead.

In Amodio, the owner did not make the initial decision to miss the tax deposits. But after he learned the taxes were overdue, the business still had unencumbered funds. The court focused on what happened next: those funds went to net wages, union benefits, and operating expenses rather than to the overdue trust fund taxes.

That distinction matters. A business may fall behind because of a cash-flow problem. But once a responsible person knows about the unpaid taxes, continuing to use available funds for other bills can be evidence of willfulness.

The practical takeaway is simple: if you discover a payroll tax balance, pause before directing remaining cash to other creditors. Get an accurate account balance and professional guidance. Keep records of what you learned and the steps you took to address it.

3. How is the penalty calculated?

The TFRP generally covers the unpaid trust fund portion of the employment taxes. That includes federal income tax withheld from employee wages and the employee share of Social Security and Medicare taxes. It does not simply equal every payroll-related amount the business owes.

That distinction can be easy to miss because a Form 941 balance may include both trust fund amounts and the employer’s matching share of Social Security and Medicare taxes. The IRS describes the general calculation on its TFRP guidance page.

Amodio also addressed what happens when the corporation has an accepted offer-in-compromise. The Tax Court held that, on the record before it, collection from the owner was capped at the corporation’s remaining employment-tax liability for the relevant periods after the accepted compromise. The precise remaining balances still had to be worked out period by period.

This does not mean that a corporate offer-in-compromise automatically eliminates an individual’s TFRP exposure. It does mean that the case recognized a limit on collection in those circumstances: the government cannot collect the same joint liability more than once.

What to do if you are behind

A missed deposit or unpaid balance is a reason to get organized, not a reason to avoid opening IRS notices. Start with the facts and take one step at a time.

1. File any missing payroll returns. Filing compliance is a requirement for a payment arrangement.

2. Get a current balance by tax period. Separate trust fund amounts from other payroll-tax amounts where possible.

3. Keep new payroll deposits current. A payment plan does not replace the obligation to make future federal tax deposits on time.

4. Ask the IRS about the right payment option. For a qualifying in-business trust fund account, the IRS’s current Simple Payment Plan (Business Trust Fund) generally applies when the assessed balance is $25,000 or less. A balance can be paid down before the agreement is granted, but the first installment cannot be used to get under the threshold.

5. Call the IRS about the business account. The individual online payment-plan application is not the setup route for this business trust fund plan. Call the number on your notice or the IRS Business and Specialty Tax Line at 800-829-4933 to discuss eligibility.

Under the IRS’s current procedures, a qualifying business trust fund plan does not require a financial statement. The IRS may still document banking and accounts-receivable information, and it must verify filing and payment compliance. The plan no longer has a 24-month cap. Instead, the proposed payments must be sufficient to pay the balance, including accrued penalties and interest, by the applicable Collection Statute Expiration Date. See the IRS’s Simple Payment Plan rules and overview for individuals and businesses for details.

The $50,000 threshold sometimes mentioned for Simple Payment Plans generally applies to other types of accounts, such as qualifying non-trust-fund business liabilities. For an in-business payroll trust fund balance, the threshold is generally $25,000. If your balance is higher, ask the IRS or a qualified tax professional about the options available for your specific situation.

Keep the next filing date in view

The third-quarter 2026 Form 941 is due November 2, 2026. October 31 falls on a Saturday, so the IRS lists November 2 as the filing deadline. Employers that timely deposited and paid the quarter’s required taxes in full may generally file by November 10. Deposit due dates still follow the employer’s regular deposit schedule. Check the IRS fourth-quarter tax calendar for the details that apply to your business.

Payroll taxes are easier to manage when the withheld amounts are kept separate from operating cash and reconciled regularly. If you would like steady support keeping your books in order, get in touch with Jenni’s Business Services. We can help you understand what is due and take the next step with more clarity and less stress.

This article is for general information and is not a substitute for advice about your specific tax situation.