What is a Trust Fund Penalty?

If you’re unfamiliar with what a Trust Fund Penalty is, you might be wondering how Employment Tax and Trust Fund Penalties are related. And you wouldn’t be the first! That’s why we, here at Bullseye Tax Relief, wanted to clear up any confusion.

In our Employment Tax blog series, we’re covering all the basics about Employment Tax – What it is, What Self-Employment Tax Is, and Employment Tax Issues and Relief – so business owners like yourself have a source they can turn to get a better understanding of all things Employment Tax in 2020 and beyond.  

In this post, we’ll get into the details about what a Trust Fund Penalty is, what causes it and what you can do to avoid receiving Trust Fund Penalties for your business.

Trust Fund Penalty

As of October 21, 2020, according to the IRS page, Employment Taxes and the Trust Fund Recovery Penalty (TFRP), a Trust Fund Penalty, also known as a Trust Fund Recovery Penalty (TFRP), exists to “encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes.”

What this means is that the IRS will issue fines and fees if a business is either late or doesn’t pay their employment taxes, especially what the IRS considers to be ‘Trust Fund Taxes.’ These taxes are different from any taxes that might be associated with a typical ‘trust fund,’ as many have come to think of the term. 

Trust Fund Taxes

In the context of Trust Fund Penalties, the IRS (as of October 21, 2020) defines Trust Fund Taxes as “money withheld from an employee’s wages (income tax, Social Security, and Medicare taxes) by an employer and held in trust until paid to the Treasury.” As we discuss in our first blog post in the series, What is Employment Tax?, these taxes like Social Security and Medicare are sometimes also known as payroll taxes or employment taxes. These are the taxes a business is required to withhold and match on behalf of their employees. Because they are “held in trust” by the business, and then paid to the IRS later on, these are also called Trust Fund Taxes.

How to Avoid a Trust Fund Penalty

The simple answer to avoiding a Trust Fund Penalty is to pay the correct amount of trust fund taxes at the correct time. While this answer may seem simple, we also recognize that there are many circumstances under which this can become more complicated, whether the business has fallen on hard times, or accounting miscalculations, or any other number of reasons. That’s why we want you to know you’re not alone. The team of experts at Bullseye Tax Relief have helped a wide range of businesses manage Trust Fund Penalties and we can do the same for yours!

Feel free to check out our Trust Fund Penalty page for more information. 

In our next blog post, Employment Tax: Trust Fund Penalty Assessment, we’ll look at the two factors the IRS considers when it decides to issue a Trust Fund Penalty.

Sources

• IRS – Employment Taxes and the Trust Fund Recovery Penalty (TFRP):
  https://www.irs.gov/businesses/small-businesses-self-employed/employment-taxes-and-the-trust-fund-recovery-penalty-tfrp
• IRS – Trust Fund Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-taxes