Posted by Income Taxes and Bookkeeping LLC

Trust Fund Tax Penalties for Small Businesses

Small businesses that have employees must collect taxes from their employees whenever the employer issues a paycheck. These funds then go into a trust fund account that employers use to pay the employee’s taxes at regular intervals. But what happens if an employer fails to withdrawal these amounts or does not turn them over to the IRS when required? Very serious penalties can result. These penalties can be a huge cost for your small business.

The best way to avoid these tax penalties is by setting up your payroll and income tax needs with a tax professional. Income Taxes and Bookkeeping in Winchester, IN can help your small business avoid unnecessary costs by making sure that you are following federal and state taxing requirements.

What Are Trust Fund Taxes?

A trust fund for employers is a fund where the amounts taken from employees are held to pay their individual income tax obligations. This also includes Social Security payment obligations and employment taxes, among other unique tax obligations for particular business types. Trust fund taxes are commonly referred by this name because the employer is supposed to hold the funds for the federal government until they are due.

If you pay out more than $2,500 per month in payroll taxes then you must report and turn over your trust fund taxes on a monthly basis. If you pay out less than this or if the payroll taxes are less than $1,000 per year, then you can make deposits on a quarterly basis. Businesses that have over $200,000 in taxes each year must use the Electronic Federal Tax Payment System (EFTPS). Most small businesses, however, will not have to use this electronic system.

When Are Trust Fund Tax Penalties Assessed?

You may be responsible for trust fund tax penalties if you are responsible for withholding income and employment taxes or other various types of taxes and you willfully fail to collect them or turn them over to the IRS.

You are responsible for this withholding if you have the duty and power to direct the collection, accounting, and payment of trust fund taxes. For small businesses with owners that wear many hats, the responsible person is usually the business owner. It could also be a member of a partnership or a corporate director or shareholder.

To have a willful failure to pay the taxes, the responsible person must have known or should have known about their tax obligation. They should have also either intentionally disregarded their obligation or were indifferent to the obligation. Employers should never use these withheld funds to pay other business obligations because that is an indication of willfulness.

If the IRS or other taxing authority finds out about your failure to collect or turn over your trust fund taxes, then they may interview you to determine if the violation was willful and whether you were a responsible person.

How Much is the Trust Fund Tax Penalty?

The penalty amount will vary from business to business. It is directly proportional to the amount of the unpaid trust fund tax. The penalty amount includes the unpaid portion plus the employee’s portion of the withheld FICA taxes. That means that you could end up paying twice what you otherwise would have paid as an employer for failing to turn over trust fund taxes.

Working with the IRS

Once the IRS determines that you owe trust fund tax penalties, they will send your small business a letter stating that they plan to charge you the penalty. You will then have 60 days to appeal, which is explained within the letter. If you choose not to respond within that time, then the penalty will be assessed against you and you will receive a Notice and Demand for Payment stating the total penalty amount and how to pay it. The longer that it takes to pay these taxes and penalties, the more it may cost you or your business.

One of the unique things about the trust fund tax is that even though it is your business that actually owes the money, the IRS can bring a collection action against you and your personal assets in some situations. They can assert a federal tax lien against virtually any property you own, including your home. They can also initiate a seizure action to take and sell your personal belongings as well.

Avoiding Penalties in Winchester, IN

Avoiding trust fund tax penalties is easy if you use a professional tax preparer service. Your tax professional can help you set up your employment withholding and develop a system for payment so you do not miss any required deposits. Contact Income Taxes and Bookkeeping by clicking the profile below or use the Contact button to set up an appointment.

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