Blog post

05 June 2017

What is trust fund penalty? What is the risk?

One of the major benefits of having a payroll services provider process your business’s payroll is they make sure to process tax payments timely from your trust fund.  Oh wait, you do not know what a trust fund is? Do you know if you even have a trust fund?  Are trust funds really related to payroll taxes? Let us explain the basics of a trust fund, the basics of a trust fund penalty and how a trust fund penalty puts your business at risk.

Payroll taxes are normally not remitted immediately upon being calculated. Those taxes are removed from an employee’s gross wages. The amounts removed from the employee, withholding taxes, social security employee portion, and Medicare employee portion, are places as taxes payable (a liability) on your business books.  The Internal Revenue Service expects and demands those taxes must be covered at all times by available funds/cash to pay those taxes in a timely fashion is called the “trust fund.” The reason it is called a trust fund is because the amounts in the account/fund are not the business’s taxes money, it is the employee’s taxes money being held in trust by the business.

Since the business is holding those funds “in trust” until the remittance is due, the Internal Revenue Service expects the business to pay those amounts promptly when due. If those taxes are not paid timely, the IRS presumes the business has either used the funds for business expenses or did not properly set aside the funds to begin with. This action, if found, will cause the IRS to charge the business with a trust fund penalty. This penalty would be on top of any late filing penalty or underpayment penalties, the trust fund penalty is a bad thing for your business. This penalty also brings some risks to your business.

The risks for your business from having issues with your trust fund and incurring a penalty can be profound and long term. Bank accounts can be frozen, liens can be placed on the business and intense scrutiny from the IRS can occur. These actions from the IRS can be debilitate a business and cause many financial hardships to the business owners as they are the ones considered responsible for the trust fund, It becomes important, and critical. To properly calculate your employee’s taxes properly hold them in your “trust fund” and timely remit the payment.