Deferring Payroll Taxes? Watch Out for the Trust Fund Recovery Penalty!
About a month ago, President Trump issued an executive order that granted employers the option to defer the withholding and deposit requirements of the employee’s portion of payroll taxes, also known as FICA taxes. These payroll taxes include taxes withheld for Social Security and Medicare. On September 1, the IRS and the U.S. Treasury Department issued a notice that explains all the technicalities of the executive order. You can find the notice here.
In the notice, the IRS stated that the deferred taxes will have to be eventually repaid and if not repaid, then “interest, penalties, and additions to tax” will accrue, starting on May 1, 2021.
Therefore, who is liable for the repayment? The employer or the employee?
Ultimately, it is the employer who is responsible for repaying the deferred employee payroll taxes. If you are a business owner, you must be very careful and really consider whether deferring the payroll taxes will work to your benefit.
What I want to share in today’s post and is something all business owners should know is what “trust funds” are and the trust fund recovery penalty (“TFRP”).
“Trust funds” are taxes that you are collecting on behalf of the government and later remitting to the government. These taxes usually include sales tax and employee’s withheld payroll and income taxes. Trust funds are not the employer’s match of the payroll taxes and are not Federal unemployment.
Under Internal Revenue Code Sec. 6672, the TFRP is assessed against anyone responsible for, and willfully fails to collect, account for, or pay payroll taxes to the IRS. Thus, for the TFRP to be assessed, there must be a “responsible person” and “willfulness” to not collect and pay the tax.
A responsible person is an owner, officer, or director of the business; has the right to hire and fire employees; signs contracts with lessors/vendors or otherwise is active to the day-to-day affairs of the business; makes payroll tax deposits; or is responsible for the disbursement of payroll. More importantly, this is someone who has check signing authority or has control over fund disbursement.
Willfulness here means a voluntary, intentional, and conscious decision to pay other creditors rather than remit the trust fund taxes to the government. So one is willfully evading to pay payroll taxes when he decides to pay other bills of the business with the employee’s payroll taxes.
The amount of the TFRP is huge. In fact, the TFRP is known as the “100% penalty” because the penalty is 100% of the unpaid payroll taxes.
Should a business owner or employer defer the collection and deposit of the employees’ payroll taxes? This is a business decision that depends on the circumstances. However, if any deferred taxes are unpaid by May 1, 2021, the business owner can face significant penalties and owe even more to the government.
In my next blog post, I will go over how our firm fights trust fund and TFRP assessments and what options are available to those facing these issues with the IRS.
You can also check out the Payroll Taxes and Trust Fund Recovery service page for more information on payroll taxes and trust fund recovery services that our firm provides.
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