When is spouse responsible for business taxes or the Trust Fund Penalty?

If the business is a sole proprietorship then the income and expenses are usually filed on a form 1040 in Schedule C.  If the owner and his spouse filed a joint return, then the spouse is responsible for the taxes as much as the owner simply because she signed the return.  However, if the company only owes payroll

 

 

taxes and the spouse had absolutely no connection with the business and had no authority to direct any business dealings, then she is not responsible for any unpaid payroll taxes.

If the business is incorporated or is an LLC or LLP and is treated for tax purposes as an “S” corporation, it will usually file a separate tax return (Form 1120) showing zero dollars owed.  Then any profit from the company will be transferred to the owner’s personal tax return as dividends.  Again, if the spouse signs a joint return he or she is liable for any unpaid taxes.  Also, unless she is involved in the business, she will not be responsible for any payroll taxes owed.

Finally, if the corporation is treated for tax purposes as a “C” corporation, then it will pay taxes directly through its own tax return.  No individual shareholder is liable for unpaid corporate taxes, only the corporation.  In the case of payroll taxes, individuals will be responsible only if the Trust Fund penalty is assessed against them.