Category: Payroll Tax

There is zero wiggle room when it comes to handling the federal income taxes and FICA taxes withheld from employees’ paychecks. The taxes are government property, which employers hold “in trust” and then remit to the IRS on a set schedule. Employers are not permitted to use this “trust fund” money for other purposes.

SERIOUS PENALTY

The penalty for breaking the rules is harsh. Any person involved in collecting, accounting for, or paying the trust fund taxes — a “responsible person” — who willfully fails to do so may be liable for a penalty equal to 100% of the unpaid taxes. The penalty is aggressively enforced.

RESPONSIBLE PERSONS

Generally, a responsible person is anyone with the power to ensure that the taxes are paid. This might include a corporation’s officers, directors, shareholders, employees, and partnership partners. Under certain circumstances, even family members and professional advisors may be subject to the penalty.

It’s not uncommon for there to be more than one responsible person. When that’s the case, each responsible person could be found liable for the full penalty.

A WORD ABOUT WILLFUL

Failure to pay trust fund taxes can be willful without being an intentional attempt to evade paying the taxes. Temporarily “borrowing” from the trust fund to meet bona fide business expenses in a pinch can qualify as being willful.

Maureen’s yoga center has grown faster than expected, so she’s considering using a third-party service to handle payroll processing and management.

Maureen consulted her tax professional and looked at IRS Tax Tips for guidance. She found she could best protect her business by hiring one of these types of services:

Certified professional employer organizations are generally only liable for filing employment tax returns and making deposits and payments for the taxes their customers report on wages and other compensation.

Reporting agents are generally limited to depositing taxes with the Electronic Federal Tax Payment System (EFTPS). Employers retain responsibility for seeing that filing returns are filed and taxes paid on time.

Section 3504 agents withhold, report, and pay employment taxes and share liability for all federal tax withholding responsibilities with the employer. Employer returns are submitted with the agent’s Employer Identity Number (EIN). Generally, customers must still file FUTA tax returns with their EINs.

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