If you employ individuals to work for you full-time, you must hold back part of their paycheck for income tax. The government requires all employers to collect and pay taxes in accordance with the Federal Insurance Contributions Act (FICA).

Failure to abide by payroll tax laws could result in serious criminal charges. 

What the law says about willful failure to collect or pay tax

According to 26 U.S. Code § 3102 and Code § 3402, all employers have a duty to collect or withhold employees’ FICA taxes for the U.S. government. As such, the Internal Revenue Code section 7202 makes it a crime to:

  • Willfully fail to withhold or collect a tax
  • Willfully fail to account for and pay tax 

Charges in this section often apply to employment tax violations. However, anyone under the law with the duty to collect or pay taxes can face prosecution under this section.

How the government proves willful failure to collect or pay tax

If you are arrested for payroll tax violation as per section 7202 guidelines, the prosecutor will have to prove:

  • A duty to collect, account for, and pay over tax: Anyone with the status, duty, and authority to collect and pay over tax
  • Failure to collect, properly account for, or pay over the tax: Any responsible person with the duty, authority, and status to collect and pay over taxes but fails to do so
  • Willfulness: Anyone with the responsibility and awareness of the law who intentionally fails to pay over taxes

If the prosecution cannot prove that these acts were intentional or willful, a misdemeanor charge may still apply for failure to withhold tax after receiving notice from the IRS.

Penalties for willful failure to collect or pay tax

If you are found guilty of willfully failing to collect or pay the taxes as stated under the law, you could face severe felony punishments. These could include up to five years of jail time and a fine for each offense, up to $100,000 for individuals or $500,000 for corporations. Penalties and interest may also apply.

As an employer, it is essential to understand the legal obligations pertaining to withholding and paying over payroll taxes to avoid being on the wrong side of the law. Failure to do so can escalate into fines, jail time, or both.