Many owners do not realize, however, that the limited liability provided by a corporation or LLC will not keep owners from being personally liable for certain withheld taxes that are to be held in withholding trust accounts.
Personal liability can also arise in other circumstances, including 401(k) or other employee benefit withholding and, in certain states, unpaid payroll. In fact, liability for employee withholdings may be imposed not only on the employer but also on a broad range of people involved in the employer’s business.
Officers, directors and responsible parties are almost uniformly held personally liable if funds have been withheld or received from one source, the funds collected are earmarked to pay a particular tax liability, and the responsible person fails to pay the taxes. Taxing authorities view such funds as being held in trust for their benefit. This applies to certain taxes at the federal level as well.
This is commonly referred to as the trust fund recovery penalty, so named because the one who is responsible for collecting and paying such taxes is deemed to hold those funds in trust for the government.