Can You Go to Jail for Not Paying Michigan Payroll Taxes?

Owning a business in Michigan means managing employees, increasing revenue, and staying compliant with local, state, and federal regulations—including payroll tax obligations. Failing to pay payroll taxes or consistently paying late is one of the fastest ways to end up being scrutinized by both the IRS and the Michigan Department of Treasury (DoT). But if you don’t pay your Michigan payroll taxes, could you end up in jail? The short answer is yes, but only under limited circumstances. 

Learn more about how payroll taxes work, the issues you may face if you don’t pay on time, and how the IRS and Michigan Department of Treasury may take action. If you’d like to learn more about payroll taxes, contact us online or call us at 877-500-4930. 

Key Takeaways

• Unpaid payroll taxes are pursued more aggressively than other types of unpaid taxes because of their trust fund nature.
• If a business fails to pay trust fund taxes, both the Michigan Department of Treasury and the IRS may hold individuals personally liable.
• Financial penalties are common, and jail time is rare except for cases involving fraud and willful misconduct.
• The sooner you address unpaid payroll taxes with a tax professional, the easier it is to get caught up and limit penalties.

What You Need to Know About Payroll Taxes

Payroll taxes are different from a business’s income taxes in one critical way. As an employer, you aren’t just paying your own share of payroll taxes. You’re also taking the part your employee owes and passing it along to the relevant tax agency. These taxes fund programs and benefits like Social Security, Medicare, and unemployment payments.

These funds are meant to go straight from employees’ paychecks to the appropriate government agency, remaining in the business’s bank account only until the company’s next deposit date. When a business collects these taxes but then fails to send them to the IRS or Michigan DoT, they have essentially violated its fiduciary duty. As a result, the government takes unpaid payroll taxes very seriously.

What Happens to Business Owners Who Don’t Pay Payroll Taxes

Unpaid payroll taxes are quickly caught and identified by automated systems that then jump in to enforce collection. You should expect to receive notices after late or missed payments. If those notices go unanswered, collection efforts may escalate.

Michigan Payroll Taxes

Per the Michigan DoT, every employer that must withhold federal income tax, as noted in the Internal Revenue Code, must also withhold income tax in Michigan. Depending on your estimated monthly payment when you register with the DoT, you may have to file returns monthly or quarterly. Payments can be made via Michigan Treasury Online or Electronic Funds Transfer. While you can pay via check, electronic methods are typically preferred.

In Michigan, the maximum penalty for a late payment of payroll taxes is 25% of the unpaid tax amount. The debt will also continue to accrue interest—for the second half of 2025, the interest rate is 8.66%.

If a company continues not to pay its payroll tax debts, the DoT may seek payment via Corporate Officer Liability. This allows the DoT to hold an officer, member, partner, or other responsible party personally liable for tax debt accrued by the corporation. The DoT has the right to collect from any individual that the DoT has determined was responsible for filing returns or making payments.

IRS Payroll Taxes

If you don’t make your federal payroll tax deposits on time, pay the correct amount, or pay in the correct manner, you may be charged payroll tax penalties. The penalty varies, depending on how late your deposit is:

• 1-5 calendar days: 2% of the unpaid deposit.
• 6-15 calendar days: 5% of the unpaid deposit.
• More than 15 calendar days (or within 10 days of the IRS’s first notice): 10% of the unpaid deposit.
• More than 10 calendar days after the date of your first notice or the day you get a demand for immediate payment: 15% of the unpaid deposit.

The IRS doesn’t hold responsible parties liable for unpaid payroll taxes. However, they do assess the Trust Fund Recovery Penalty, which can have a significant impact on your personal finances.

The Trust Fund Recovery Penalty and Its Role in Tax Collection

The Trust Fund Recovery Penalty (TFRP) is one of the most severe consequences of failing to deposit payroll taxes. Unlike state agencies (including the Michigan DoT), the IRS doesn’t technically hold individuals responsible for a business’s tax debt. However, the IRS does identify responsible parties—typically via interviews or investigations—and assess the Trust Fund Recovery Penalty. 

The TFRP is equal to 100% of the unpaid balance of the trust fund tax. Once this penalty is assessed, the responsible person is liable for it, and the IRS can use liens, levies, wage garnishments, and other collection actions to recover the penalty. 

The TFRP is typically not discharged in bankruptcy, as it’s given priority status. Additionally, shutting the business down doesn’t protect you from the TFRP—this amount remains due even after a business closes its doors. 

Is Jail a Possibility?

Jail time for unpaid payroll taxes is a possibility, but it isn’t common. Incarceration is only a likely outcome when the IRS or Michigan DoT can successfully prove willfulness. The government doesn’t look at honest mistakes and financial hardship the same way it looks at a business’s willful misconduct. Examples of willful conduct could include:

• Intentionally and knowingly using payroll money to cover other business expenses.
• Filing false tax returns.
• Ignoring government notices.
• Hiding assets or business records.

Per Michigan Compiled Laws 205.27, a party that breaks the law with the intent to defraud or evade the payment of a tax (or help someone else defraud or evade tax payment) is guilty of a felony. This is punishable by up to five years in prison, fines of up to $5,000, or both.

At the federal level, 26 U.S. Code Section 7202 addresses the willful failure to collect or pay over tax. Anyone who willfully fails to collect, pay, or account for tax is guilty of a felony. Penalties include up to five years in prison and fines of up to $10,000. 

If an individual attempts to evade or defeat tax, they face fines up to $100,000 for individuals and $500,000 for businesses, or both, per 26 U.S. Code Section 7201. However, the IRS notes that criminal fine provisions increase the maximum fine to $250,000 for individuals. Additionally, if the fraud results in financial gain for the individual or financial loss to someone else, the defendant may be fined up to twice the gross gain or twice the gross loss.

Understanding Willful Failure to Remit

To charge you criminally, the IRS or Michigan DoT must show that you knew payroll taxes were due and chose not to pay them. They may be able to prove this by showing that you paid other business expenses, previously paid payroll taxes (and therefore knew that they were your responsibility), or altered records to evade liability. Even if a business owner uses payroll funds in a good-faith effort to keep their business afloat, diverting payroll taxes is considered intentional misconduct.

Address Your Payroll Tax Debt Before It Escalates

The most important thing to remember is that waiting makes this situation worse. The longer you wait, the more deposit dates you miss and the more your debt grows. As the debt grows, the likelihood of levies and personal liability for the debt increases. 

One of the reasons taxpayers wait to deal with taxes is that they can’t afford to pay them. This is a common struggle, and there are various avenues available:

• Payment plans are available through the IRS and the Michigan DoT.
• Offers in compromise are available in some cases, although not for trust fund taxes themselves.
• Penalty abatement if you have reasonable cause for your failure to pay.

Not Sure What to Do Next? W Tax Group Can Help

At W Tax Group, we know how hard you’ve worked to build your business. We’re here to help ensure that unpaid Michigan taxes don’t stop your business from thriving. By taking action early, you can get back on track, avoid aggressive collection efforts, and protect your business. Schedule a consultation now by calling us at 877-500-4930 or contacting us online.

Frequently Asked Questions

Can I be held personally liable for payroll taxes?

Yes. You can potentially be held personally liable for unpaid payroll taxes, both at the state and federal levels.

What if my business is closed?

Even if a business closes, the unpaid payroll taxes must be paid to the appropriate agency. The IRS and Michigan Department of Treasury can hold individuals liable for the unpaid debt.

How much payroll tax debt leads to jail time?

Whether or not unpaid tax debt leads to jail time isn’t determined by how much debt there is. Rather, it’s determined by whether the conduct that led to the tax debt was willful and intentional.

I’ve received a notice about unpaid payroll taxes. What should I do?

Act immediately. The longer you wait, the further you fall behind and the harder it is to catch up. Call a tax professional before personal liability is on the table.

Sources:

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