If you’re a business owner and have employees, you are aware that there is a mandatory requirement to timely pay employment taxes. But what exactly are employment taxes?
Employment taxes are withheld federal income tax, withheld social security and Medicare taxes, and withheld Railroad Retirement taxes. These taxes are referred to as trust fund taxes because you (the employer) hold the employee’s money in trust until you make the federal tax deposit.
As an employer you are required to withhold certain taxes from the employee’s paychecks. The amount withheld from the employee’s paycheck depends on the number of allowances the employee is claiming, which they report on Form W4. As the reporting requirement for the deposit of these funds is not the same for all businesses, be sure that you know when your business is required to deposit the funds. In addition to all other payroll needs, payroll companies also handle the deposit of the employment taxes. Even though you may have your payroll services provider handling the employment tax deposits, it is a good idea to know what the due date of the deposits are, and to regularly check to make sure that the deposits are being made timely and in the right amounts. It is important that you pay your employment taxes because if you don’t, and you are considered a responsible person of the business, and you can get hit with the Trust Fund Recovery Penalty (TFRP). A responsible person is a person, or a group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. The person can be any of the following:
- An officer or an employee of a corporation;
- A member or employee of a partnership;
- A corporate director of shareholder;
- A member of a board of trustees of a nonprofit organization;
- Another person with authority and control over funds to direct their disbursement;
- Another corporation of third-party payer;
- Payroll Service Providers (PSP) or responsible parties within a PSP
- Professional Employer Organizations or
- Responsible parties within the PSP/PEO) The Trust Fund Recovery Penalty is a penalty imposed against any responsible person who is required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. The TRFP may be imposed for:
- Willful failure to collect tax
- Willful failure to account for and pay tax, or
- Willful attempt in any manner to evade or defeat tax or the payment thereof.
- For willfulness to exist, the responsible person:
- Must have been, or should have been, aware of the outstanding taxes and
- Either intentionally disregarded the law or was plainly indifferent to its requirements.
