Payroll taxes are not optional. Yet many nonprofits, especially small or cash-strapped ones, fall behind. When that happens, the IRS has powerful tools to collect unpaid payroll taxes—sometimes directly from board members or officers.

Payroll Taxes Explained
Every employer, including nonprofit organizations, must withhold federal income tax and Social Security/Medicare (FICA) taxes from employee paychecks. Employers must then remit both the employee withholdings and the employer’s share. These funds are referred to as “trust fund taxes” because the employer holds them in trust for the government.

What Happens If They’re Not Paid?
If a nonprofit fails to deposit payroll taxes, the IRS will first pursue the organization. But if the nonprofit can’t pay, the IRS may assess the Trust Fund Recovery Penalty (TFRP) against individuals. This penalty equals 100% of the unpaid trust fund taxes—not just a portion of them.

Who Can Be Personally Liable?
The IRS can hold “responsible persons” personally liable if they willfully fail to collect or pay over payroll taxes. In a nonprofit, this may include:

• Executive directors or CEOs who control finances
• CFOs, treasurers, or finance directors
• Board members with check-signing authority or oversight of payroll decisions
• Anyone with the power to direct how funds are disbursed

It is not limited to paid staff. Volunteer board members can be drawn upon for unpaid payroll taxes if they possess the necessary authority and knowledge.

The Responsible Party on the EIN Application
When a nonprofit applies for an Employer Identification Number (EIN), it must list a “responsible party.” This individual typically holds the ultimate authority over the entity’s funds and assets—often the founder, board chair, or executive director.

• The responsible party is not automatically liable for unpaid payroll taxes simply because they are listed on the EIN application.
• However, listing someone as the responsible party signals to the IRS who is in charge of the organization’s finances and decision-making. If that individual also meets the criteria for a “responsible person” under the Trust Fund Recovery Penalty, they can be personally liable.
• The IRS requires that the responsible party remain current with their tax obligations. If leadership changes, the nonprofit must file Form 8822-B within 60 days to update the information. Failure to update the responsible party can complicate enforcement and increase scrutiny.

Willfulness Standard
Liability for unpaid payroll taxes requires “willfulness,” which in this context means voluntarily, consciously, and intentionally preferring other bills over payroll taxes. Paying vendors or salaries while ignoring IRS deposits often qualifies.

Practical Red Flags

• Board members sign checks without asking questions
• Payroll service providers are hired but not monitored
• The nonprofit is behind on IRS Form 941 filings
• Cash-flow issues lead to delays in tax deposits

Protecting Yourself as a Director or Officer

• Confirm that payroll taxes are being deposited on time.
• Require regular financial reports that show tax deposits and IRS filings.
• Ask direct questions—“Are we current on payroll taxes?”—and document the answers.
• If you suspect a problem, act immediately. Ignoring it can create personal liability.
• Consider outsourcing payroll processing.

Why It Matters
Nonprofits do not get a pass because they are mission-driven. The IRS treats unpaid payroll taxes as serious misconduct, and board members who fail to exercise oversight may find themselves personally liable. Directors must remember that their fiduciary duty includes ensuring compliance with tax obligations and regulations.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.