Lender's role in borrower’s unpaid payroll tax obligations
Lenders will be surprised to learn that they may be liable for a borrower’s unpaid payroll tax obligations. Lenders supplying funds to borrowers for the specific purpose of paying wages, with knowledge that the borrower will not be able to meet its payroll tax obligations, may be personally liable for such unpaid taxes. This liability can extend to lenders who have no knowledge of a borrower’s inability to meet payroll tax obligations if the lender could have found out by exercising due diligence.
While a lender’s potential liability is limited to 25% of the amount loaned for wage paying purposes, and the underlying tax liability is unlikely to break the bank, lenders would be wise to perform enough due diligence to ensure that borrowers have the funds necessary to cover their payroll tax obligations. In addition, lenders can incorporate simple provisions into loan documents that provide valuable protections against any unnecessary liability for a borrower’s payroll tax delinquency.
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