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Houston Payroll Tax Attorneys

If you searched for a “payroll tax attorney” or “941 tax attorney,” you are probably dealing with the IRS over unpaid employment taxes, a worker classification dispute, or a proposed trust fund recovery penalty. We are Houston tax lawyers, and we handle these cases every week. This page explains how employment taxes work, where they go wrong, and how we help clients fix the problem before it shuts the business down.

Payroll tax disputes are different from most IRS cases. The IRS does not have to follow the same notice and appeal procedures it uses for income tax, and the collection tools available to it are more aggressive. The amounts add up fast because penalties stack on top of penalties and interest on employment taxes cannot be abated. That combination is why employment tax problems can sink an otherwise profitable business.

How Payroll Taxes Work

An employer is required to withhold federal income tax, Social Security, and Medicare from each employee’s wages and to match the Social Security and Medicare portion. Those amounts are reported on Form 941 quarterly (or Form 944 annually for the smallest employers), and federal unemployment is reported on Form 940. Payments are made on a monthly or semiweekly deposit schedule depending on the employer’s lookback liability, and a one-day rule applies once accumulated taxes hit $100,000. Nonpayroll withholding (backup withholding, pension distributions, gambling) goes on Form 945.

The withheld portion is what the law calls “trust fund” money. It belongs to the employees and is held in trust for the United States until it is deposited. That status is what gives the IRS its extraordinary collection powers in this area and is the basis for personal liability against owners, officers, and even bookkeepers in the right facts. We explain those rules in detail on our page on trust fund recovery penalty disputes.

Late Deposits and Failure to File

The most common payroll tax problem we see is a business that has been making payroll but not depositing the withheld taxes on time. The Form 941 still gets filed, the return shows what is owed, and the deposits trail behind. Once a quarter or two slip, the failure-to-deposit penalty and the failure to file additions push the balance well above what the business actually owed in tax. Catching this in the first quarter it happens is much cheaper than waiting for a notice.

Unfiled Forms 941 are even worse. The IRS will eventually file a substitute return using its own assumptions, which almost always overstates the liability. Filing the correct returns, even late, restarts the clock and gives us something to work with on penalty abatement and installment payments. We handle unfiled employment tax returns regularly.

Employee vs. Independent Contractor Classification

Classifying a worker as an independent contractor when the facts make the worker an employee is the other half of most payroll tax cases. The IRS uses common-law factors focused on the degree of control the business has over how the work is performed, plus financial control and the nature of the relationship. Industry custom is not the test, and signing a 1099 contractor agreement is not the test. The IRS pursues these cases aggressively because reclassifying just a handful of workers can trigger years of back tax, penalties, and interest.

We help businesses with employee vs. contractor disputes, including using Section 530 relief where the business has consistently treated workers as contractors and has filed the required 1099s. We also handle the related questions about statutory employees and S-corporation owners who try to reduce payroll taxes through low salary plus distribution strategies.

The Trust Fund Recovery Penalty

When a business cannot pay its withheld employment taxes, the IRS turns to people. Under Section 6672, any person who was responsible for collecting or paying over the trust fund taxes and who willfully failed to do so can be personally assessed for the trust fund portion of the unpaid 941 liability. That assessment becomes that individual’s personal tax debt, collectible against personal assets, even after the business is gone.

“Responsible person” and “willfulness” are the two battlegrounds. We have defended owners, CFOs, controllers, bookkeepers, and even spouses who were swept into Section 6672 assessments they should not have faced. We also handle cases where the IRS expanded liability based on check-signing authority alone or where the taxpayer loaned money to the business at the wrong time. Each fact pattern has a different defense.

Personal Liability for Single-Member LLC Owners

For employment taxes incurred before January 1, 2009, a single-member LLC was a disregarded entity for federal employment tax purposes, and the owner could be held liable for the LLC’s payroll taxes directly. The regulations were amended so that, by default, the LLC itself is now liable for employment taxes on its own employees. See Treas. Reg. § 301.7701-2(c)(iv). The Sixth Circuit confirmed the pre-2009 rule in Littriello v. United States, 484 F.3d 372 (6th Cir. 2007).

Despite the clear rule, the IRS routinely tries to levy on single-member LLC owners personally for the LLC’s payroll taxes. We push back on these wrongful levies and force the IRS to follow its own regulations. The trust fund recovery penalty still applies, but that is a separate assessment with separate procedural rights, not a back-door assessment of the LLC’s tax against the owner.

IRS Collection Tools for Payroll Tax

The IRS has collection tools for employment taxes that it does not have for income tax. The disqualified employment tax levy lets the IRS levy without the usual pre-levy collection due process hearing when an employer has a prior employment tax delinquency. A federal tax deposit alert can result in a Revenue Officer showing up at the business unannounced. And the IRS has even sought injunctions to force ongoing compliance or to require use of a payroll service.

Once balances exist, the standard IRS collection tools come into play: federal tax liens, levies on bank accounts and receivables, and revenue officer field collection. We handle these cases in tandem with the underlying liability work so the business has room to operate while we negotiate.

Penalties and Interest on Employment Taxes

Employment tax penalties include the failure to deposit penalty (which scales from 2% to 15% based on how late the deposit is), the failure to file penalty, the failure to pay penalty, and the accuracy-related and civil fraud penalties for misreported returns. The IRS also assesses the accuracy-related penalty for negligence and disregard of the rules. We pursue penalty abatement through reasonable cause, first-time abate, and Appeals when the IRS has misapplied its own procedures. More on IRS penalties and abatement.

Interest on employment taxes is a particular trap. Unlike most other interest, it generally cannot be abated even when the IRS caused the delay. The only practical way to control it is to resolve the underlying tax quickly, which is why we move fast on these cases.

Criminal Liability for Unpaid Payroll Taxes

Failure to pay over withheld taxes is also a crime under Section 7202, and the IRS Criminal Investigation Division does pursue these cases. The Department of Justice has obtained criminal convictions against owners who used the withheld trust fund money for personal expenses, paid other creditors first, or operated multiple entities to evade the assessment. We handle the civil side of these matters and coordinate with criminal counsel when the case has both tracks. Our overview of criminal liability for employment taxes walks through the elements.

PEOs, Outsourced Payroll, and Statutory Employees

Many Houston businesses use a professional employer organization or third-party payroll service. PEO arrangements raise interesting questions about which entity is the “employer” for withholding, deposit, and employment tax credit purposes. We have written about who gets the tax credit when you outsource payroll to a PEO. If you used a payroll service that took your money and did not deposit it with the IRS, you may still be liable to the IRS even though you paid the service. We have helped clients work through those facts.

Statutory employees, statutory non-employees, and certain industry-specific classifications (real estate agents, direct sellers, drivers) have their own rules and their own audit risk. We handle these cases when they come up.

ACA Employer Penalties

For applicable large employers (50+ full-time equivalents), the Affordable Care Act layers additional employer shared responsibility penalties on top of the regular employment tax rules. The IRS uses Letter 226-J to propose the assessment, and the response window is short. We handle ACA employer penalty disputes, including challenges to the IRS’s full-time equivalent calculations and offers of coverage data.

Settlement Options for Payroll Tax Debt

The business and the responsible individuals usually need separate workout plans. For the business, an installment agreement on the back balance combined with strict current compliance is often the right path. For individuals hit with the trust fund recovery penalty, an offer in compromise, currently not collectible status, or a personal installment agreement may be appropriate. The numbers must line up before we recommend a path, and we always run the analysis before filing anything with the IRS.

Where the IRS has already filed a notice of intent to levy, we file the Collection Due Process request and use the CDP appeal to negotiate the resolution while the levy is suspended. Our overall IRS collections page explains how the rest of the toolkit fits together.

Litigation and Refund Claims

Some employment tax disputes can only be resolved in court. The trust fund recovery penalty has its own statutory refund procedure: pay the tax for one employee for one quarter, file a refund claim, and sue in district court. Worker reclassification cases can go to the U.S. Tax Court under Section 7436. Larger employment tax matters sometimes go to the Court of Federal Claims. Our tax litigation page explains the choice of forum, and we have written about preserving judicial review for trust fund cases.

Working With Our Houston Payroll Tax Attorneys

Most clients come to us in one of three situations. Either the business has fallen behind on 941 deposits and is trying to get current before the IRS shuts it down, the IRS has proposed a trust fund recovery penalty against an owner or officer, or a worker classification audit has just landed. In each case the first conversation is short: how far back does the problem go, who had authority over deposits, and what does current compliance look like.

From there we map out the work. That usually means getting current returns filed, stopping levy activity, building the responsible-person and willfulness defense for the trust fund recovery penalty, and negotiating a workout that lets the business keep operating. Our fee schedule sets out how we charge for these matters, and our attorneys have handled these cases for decades.

Get Help With Your Payroll Tax Problem

An experienced payroll tax attorney can help you understand your obligations as an employer and resolve the payroll tax problem before it costs you the business. We also review and restructure employee and independent contractor relationships so the problem does not happen again.

Please call us at (713) 909-4906 or schedule an appointment with our payroll tax attorneys.