Anyone who has ever received a paycheck knows there are taxes withheld from their gross pay. These taxes are referred to as withholding taxes and generally include:
Most states have a personal income tax. However, nine states do not have a personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, New Hampshire and Tennessee tax only dividend and interest income.
Federal income taxes, social security, and Medicare taxes withheld from employees' wages are called trust fund taxes because you hold them in trust until you turn them over the the U.S. Treasury.
There have been many cases where a small business owner withheld these taxes from employees' paychecks and simply kept them for himself and never turning them over the the U.S Treasury. A very dumb move!
Failure to withhold and remit trust fund taxes to the U.S. Treasury can result in stiff penalties and even criminal prosecution if you knowingly and intentionally did not turn these taxes over the the Fed.
The Trust Fund Recovery Penalty:
The Trust Fund Recovery Penalty is 100% of the tax due! And get this, not only can the business owner be held liable for these taxes, other people responsible for handling the business's payroll, such as the bookkeeper, can also be held liable for nonpayment of trust fund taxes.
Best advice: Use a payroll service. You'll sleep a lot better.
If you have employees, using a payroll service is one of the smartest and cheapest things you can do to protect yourself and eliminate the hours that go into payroll processing, reporting, a tax compliance. Not to mention the preparation and issuance of paychecks.