Federal tax law requires employers to withhold certain taxes from their employees’ wages, and to remit those amounts to the IRS. These are known as “trust fund” taxes, since the employer holds them in trust for the employee. In the event an employer fails to withhold these taxes, or fails to remit them, the consequences can be significant, so a conversation with a Pennsylvania tax attorney can be beneficial for all involved. The Trust Fund Recovery Penalty (TFRP) is one of the largest penalties authorized by the Internal Revenue Code (IRC). The COVID-19 pandemic has harmed businesses in Pennsylvania and all over the country. Despite the difficulties many employers are facing, the IRS is unlikely to offer any latitude in the payment of trust fund taxes.
What Is the Trust Fund Recovery Penalty?
Section 6672 of the IRC allows the IRS to assess and collect a penalty from anyone who is obligated to collect and pay trust fund taxes when they “willfully” do the following:
– Fail to collect the required tax;
– Fail to “truthfully account for and pay over such tax”; or
– Try “to evade or defeat any such tax or the payment thereof.”
The penalty is equal to the total amount of tax that the person failed to collect, failed to account for and pay, or attempted to evade.
What Taxes Are Covered by the Trust Fund Recovery Penalty?
Trust fund taxes commonly include personal income tax and the taxes that go towards Social Security and Medicare under the Federal Insurance Contributions Act (FICA). Employers must withhold an estimated amount of each employee’s wages for federal income tax, based on information provided on Form W-4. FICA requires employers to withhold 7.65 percent of an employee’s wages from each paycheck — 6.2 percent for Social Security and 1.45 percent for Medicare. Most employers must submit withheld amounts every month, and file quarterly returns with the IRS.
Employers are responsible for matching each employee’s FICA taxes, so while an employee is only liable for 7.65 percent, the total amount paid to the government under FICA is 15.3 percent of the employee’s pay. The employer’s share of FICA taxes is not necessarily considered to be a trust fund tax, but the IRS will still use vigorous means to collect it. For self-employed individuals, the Self-Employed Contributions Act (SECA) requires payment of what would otherwise be both the employee and employer’s share of payroll taxes.
Who Is Responsible for Payroll Taxes?
The TFRP is notable because it allows the IRS to pursue individuals, not just business entities. This could include any officer, partner, manager, board member, or other person with official responsibility for collecting and paying trust fund taxes. The only exception made by the statute is for nonprofit board members who work as volunteers.
How Does the CARES Act Affect Payroll Taxes?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided a wide range of economic stimuli earlier this year. Section 2202 provides a deferral of employer payroll taxes under SECA and FICA. This only applies to the employer’s share of FICA taxes, meaning employers are still obligated to withhold and pay their employees’ portion by the deadlines set by the IRS.
Brandywine Tax Resolution is dedicated to representing Pennsylvania taxpayers. If you are dealing with a trust fund penalty or other tax problem, a tax attorney can advise you of your legal options, go to court on your behalf if necessary, and help you find solutions tailored to your particular circumstances. Please contact us today, online or at (610) 235-7577, to schedule a confidential consultation with a skilled and proficient taxpayer advocate.