What to Do If You Can’t Afford to Pay Your Payroll Tax Debt
Payroll Tax Debt Is One of the Most Dangerous Kinds of IRS Debt
When your business falls behind on payroll taxes—especially the amounts withheld from employees' paychecks—things can escalate fast. The IRS treats unpaid trust fund taxes as one of the most serious violations of tax law.
You may be worried about how to pay, how much you owe, or whether the IRS will come after you personally. This guide walks you through what to do when you can’t afford your payroll tax debt, and how to protect yourself, your business, and your future.
What Happens If You Don’t Pay Payroll Taxes?
The IRS and California FTB can:
- File federal tax liens
- Seize your business assets
- Freeze bank accounts
- Issue levies on receivables
- Assess the Trust Fund Recovery Penalty (TFRP) against you personally
Related: Behind on Payroll Taxes? Orange County Businesses, Here’s What to Do Now
Step 1: File All Past-Due Payroll Tax Returns
Even if you can’t pay, file the required returns:
- IRS Form 941 (quarterly)
- IRS Form 940 (annual FUTA)
- California DE-9 and DE-9C (state reporting)
Filing keeps penalties from compounding and shows the IRS you’re not trying to conceal the debt.
Related: Facing Back Taxes? Here’s How Orange County Residents Can Get Relief
Step 2: Don’t Delay Contacting the IRS
If the IRS has sent notices or is calling, don’t wait.
Responding early allows you to:
- Request a short-term hold to gather documents
- Prevent levies or garnishments
- Qualify for an Installment Agreement or hardship relief
Once the IRS assigns a Revenue Officer, you’ll have fewer flexible options.
Step 3: Explore These Payroll Tax Resolution Options
A. Installment Agreement
Set up structured monthly payments to repay the tax debt over time.
Related: How to Set Up a Payment Plan with the IRS
B. Offer in Compromise
You may qualify to settle for less than the full balance—even for payroll tax debt—if your business is insolvent or struggling financially.
Related: IRS Offer in Compromise – How to Settle for Less Than You Owe
C. Currently Not Collectible (CNC)
If your business can’t afford to make any payments, the IRS may grant temporary CNC status and suspend enforcement actions.
Related: How to Qualify for IRS Hardship Status
D. Voluntary Disclosure + Reasonable Cause Letter
If you’re concerned about willfulness or prior non-filing, get in front of the issue and document your reasons (e.g., medical crisis, natural disaster, employee theft).
Step 4: Avoid Personal Liability
If you’re an owner, officer, or payroll manager, the IRS may attempt to assess the Trust Fund Recovery Penalty against you personally.
Related: IRS Trust Fund Recovery Penalty – What Business Owners Need to Know
To protect yourself:
- Don’t delegate payroll without oversight
- Make federal deposits before any other payments
- Respond to IRS Letter 1153 immediately
Step 5: Don’t Wait for an IRS Revenue Officer Visit
If you’ve ignored notices and phone calls, the IRS may send someone to your place of business.
A Revenue Officer has the power to:
- Seize business assets
- Interview employees
- Recommend referral to the IRS Criminal Investigation Division
Proactive resolution is far safer—and often cheaper.
We Help Orange County Businesses Solve Payroll Tax Problems
At Boulanger CPA and Consulting PC, we help employers:
- Avoid or resolve the Trust Fund Recovery Penalty
- Negotiate with IRS Revenue Officers
- Set up payment plans or hardship-based settlements
- Restore compliance without losing their business
Call
(657) 218-5700
or request a strategy call at
www.orangecounty.cpa
We serve businesses across Orange County and California.
Frequently Asked Questions
What happens if I can’t pay payroll taxes?
If you fail to pay payroll taxes, the IRS or EDD may assess penalties, file tax liens, garnish wages, or levy business bank accounts. In serious cases, responsible individuals may face personal liability under the Trust Fund Recovery Penalty (TFRP).
Can payroll tax debt be settled for less?
In rare cases, yes. An Offer in Compromise may be available through the IRS or California FTB, but settlements for payroll debt are harder to obtain than for personal income tax. You’ll need to show severe hardship and compliance moving forward.
Can I set up a payment plan for payroll taxes?
Yes. Both the IRS and EDD offer installment agreements for payroll tax debt. However, the approval process is more stringent than for personal taxes, and you must stay current on all new deposits to keep the plan in place.
Can I be personally liable for unpaid payroll taxes?
Yes. The IRS and EDD can assess individuals—such as owners, officers, or payroll signatories—personally under the TFRP if they willfully failed to deposit trust fund taxes. This can lead to personal wage garnishment or levies.
Should I hire a CPA to resolve payroll tax issues?
Absolutely. A CPA can protect your business, negotiate payment terms, prevent personal liability, and resolve disputes with the IRS, EDD, or FTB. Quick action is critical to preserving your bank accounts and operations.
📣 About the Author
Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, a boutique tax resolution firm based in Orange County, California and trusted by high-income individuals and business owners across Southern California.
He is the author of Defend What’s Yours: A California Taxpayer’s Guide to Beating the IRS and FTB at Their Own Game, available now on Amazon. The book offers a step-by-step plan for resolving IRS and FTB tax debt without losing your business, your home, or your peace of mind.
With over a decade of experience resolving high-stakes IRS and State tax matters, Marc brings strategic insight to complex cases involving wage garnishments, bank levies, unfiled returns, and six-figure tax debts. He is known for helping clients reduce or eliminate tax liabilities through expertly negotiated settlements and compliance plans.
Marc is a Certified Public Accountant licensed in California and Oklahoma and holds the designation of Certified Tax Representation Consultant. He is a member of the American Society of Tax Problem Solvers (ASTPS) — the national organization founded by the educators and practitioners who have trained thousands of CPAs, EAs, and tax attorneys in IRS representation strategy.
Every case is handled with discretion, proven methodology, and direct CPA-led representation — not call center scripts.
📍 Learn more at www.orangecounty.cpa or call (657) 218-5700.
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