Trust fund taxes, often referred to as payroll taxes, represent one of the most serious tax obligations for business owners and responsible employees. Unlike a business’s income tax liability, the willful failure to remit trust fund taxes can result in the Internal Revenue Service (IRS) pursuing individuals personally through the Trust Fund Recovery Penalty
What Are Trust Fund Taxes?
Trust fund taxes include the federal income tax, Social Security (FICA), and Medicare taxes that an employer withholds from their employees’ wages. These funds are legally considered to be government property from the moment they are withheld.
The term “trust fund” signifies a legal relationship: the employer is holding the employees’ money “in trust” for the U.S. Treasury until they are periodically paid to the IRS through Federal Tax Deposits (FTDs). The employees trust that the employer will remit these amounts to ensure their tax obligations are met and their future benefits are secured.
The Trust Fund Recovery Penalty (TFRP)
When a business fails to remit the required trust fund taxes, the IRS can use the Trust Fund Recovery Penalty (TFRP), to collect the unpaid amount. The penalty is equal to 100% of the unpaid trust fund tax balance and is assessed against the responsible individuals, not just the business entity.
The penalty is calculated based on:
- The unpaid withheld federal income tax.
- The employee’s portion of the withheld Social Security and Medicare (FICA) taxes.
- It does not include the employer’s matching share of FICA.
Because this penalty results in personal liability, the IRS can pursue a responsible person’s home, savings, and personal bank accounts to collect the debt.
Who Can Be Held Liable?
The TFRP can be assessed against any “responsible person” who has the duty and power to direct the collecting, accounting, and paying of trust fund taxes and willfully fails to do so. Job titles are not the deciding factor; authority over financial decisions is.
Responsible people can include:
- Owners, partners, and corporate officers.
- Employees with authority over financial decisions, such as payroll managers, bookkeepers, and accountants.
- Board members, trustees, and outside payroll service providers (PSPs) with payment authority.
Defining “Willful” Failure
For the TFRP to be assessed, the failure to pay must be “willful,” meaning voluntary, conscious, and intentional. Willfulness exists if the responsible person was, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements.
A common indication of willful behavior is using available withheld funds to pay other business expenses or creditors instead of depositing the payroll taxes with the IRS.
If your business is behind on trust fund taxes:
- Do not ignore IRS notices, and act immediately to explore resolution options.
- Seek professional help to navigate the investigation, appeal, or negotiate payment options, such as installment agreements or an Offer in Compromise.
If you have any questions or concerns regarding Trust Fund Tax Liability or the Trust Fund Recovery Penalty, Timberline Tax is well versed with addressing the situation head on and walking our clients through the process step by step.
https://www.irs.gov/irm/part5/irm_05-019-014r
Zarek Lehl, EA
(720) 613-0318
Timberline Tax Group, LLC