What Are Trust Fund Taxes?

Trust fund taxes

Trust fund taxes are taxes an employer is required to withhold from an employee's pay and turn over to the U.S. Treasury.

Trust fund taxes include:

  • Federal income taxes withheld from each employee's pay
  • The employee's share of social security and Medicare taxes withheld.

If these taxes are not withheld, or, if they are withheld but not remitted to the United States Treasury, the trust fund recovery penalty may apply. Keep in mind, filing bankruptcy will not discharge trust fund taxes.

The Trust Fund Recovery Penalty equals the full amount of federal income taxes you were required to withhold plus each employee's share of social security and Medicare taxes you were required to withhold.

Who is Responsible For the Trust Fund Recovery Penalty?

The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have acted willfully in not carrying out their responsibility for collecting, accounting for, and paying these taxes to the United States Treasury.

Willfully means voluntarily, consciously, and intentionally. A responsible person acts willfully if he/she knows that the required actions are not taking place.

The IRS takes non compliance with the rules for handling trust fund taxes seriously. Consequently, the IRS can go beyond just the owners of a company in assigning liability. Other individuals within the organization may also find themselves liable for trust fund taxes.

The following individuals may be potential targets:

  • An officer or employee of a corporation
  • A partner or employee of a partnership
  • An accountant
  • A volunteer director/trustee
  • An employee of a sole proprietorship
  • A responsible person may also include one who signs checks for the business or otherwise has authority to cause the spending of business funds.

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