The Scenario – You need to make payroll this week but don’t have the cash. So, you go to Mom for a loan. She wants to help, but has limits. So, she writes you a check for the exact amount of the net payroll, and good record-keeper that she is, writes in the memo, “Net payroll due June 19, 2020.”
NOT such a great idea!
IRC Section 3505 allows the IRS to collect unpaid payroll Trust Funds from third party lenders. This applies when lenders lend funds for payroll knowing that the employer could not or would not deposit the required federal payroll taxes.
Yes, taking a loan for the net amount of the payroll is reasonably good proof that the loan was only for payroll; it was unlikely that the corresponding payroll deposit would be made. The IRS uses this evidence to assess the unpaid taxes on Mom, who may no longer love you as much.
How do you avoid alienating Mom? Do what professional lenders do in such loan circumstances. First, they’d never make the loan for the exact amount of the net payroll. Second, the loan agreement would NOT specify that the money was to be spent on payroll. This is a reasonably easy way to avoiding putting Mom down a hole.
If you or someone you know has received a Notice of Intent to Levy or has some other federal or state tax problem, please feel free to call or text me at (352) 317-5692 or email me at firstname.lastname@example.org .