What is Trust Fund Penalty?

A Trust Fund in terms of employment tax should not be mistaken with a trust fund in terms of wealth management. This is the payroll tax amount assessed to the officers of the business. Tax resolution can help reduce and or arrange the payment of these taxes.

What is a Trust Fund Recovery Penalty (TRFP)?

A Trust Fund Recovery Penalty can be assessed if the unpaid trust fund taxes cannot be immediately collected from the business. This often happens if the business falls on hard times and taps into that fund for any reason. According International Revenue Code 6672(a) an individual can be held liable for penalty for willful failure to collect, account for, or pay to the IRS the taxes for the business.

Who is Held Responsible for the TRFP?

According to the IRS, the TRFP can be assessed against any person who is: responsible for collecting or paying withheld employment taxes, willfully fails to collect or pay the taxes.

Business Payroll Tax

All employers must report and deposit business payroll tax to the Internal Revenue Service (IRS) throughout the year. In other words, every employer must report the amount of employment taxes paid. At the end of the year, employers must prepare a Form W-2, Wage and Tax Statement. Next, they must deliver this W-2 to their employees and file it with the IRS. This form reports wages, tips and any other compensations paid to an employee by the business entity. Further, it reports the collection and deposit of all taxes withheld from the employee’s paycheck.

Employers are responsible for the collection, reporting and depositing of several taxes. These business payroll taxes include:

Federal Income Tax

Social Security and Medicare Tax

Additional Medicare Tax

Federal Unemployment Tax (FUTA)

Self-Employment Tax (SE tax)

Employment or Business Payroll Tax

Employers calculate the amounts to withhold for the federal income tax from employees’ wages. They use charts published by the IRS. Then these amounts are deposited by the employer and paid to the IRS. Finally, these monies are used by the government to pay for services that benefit the entire nation. Such services include the building and maintenance of the infrastructure, governmental services, and military. In fact, these monies pay for other services that the United States government provides its citizens.

Besides the withholding of this federal income tax from each paycheck, employers must withhold other taxes. Included in this withholding is the Social Security and Medicare taxes from the employees’ wages. In addition, the employer must pay a matching amount. The employee tax rate is 6.2% for Social Security for 2021. The base limit is $142,800 for 2021. These funds provide monies and medical services to retirees.

Since 2013, employers must withhold 0.9% Additional Medicare Tax on each of their employees’ wages. Furthermore, they must also withhold on any compensation that exceeds a threshold amount according to the employee’s filing status. There is no employee match for the Additional Medicare Tax. In other words, the employer pays this tax alone.

In addition to the Federal Income Tax, employers report and pay the Federal Unemployment Tax (FUTA). Again, employers must pay the entire FUTA tax from their own funds. Employees who become unemployed can withdraw from this fund. The amount available to the employee is determined by the amount he or she paid into the fund.

Self-Employment Tax

individuals who work for themselves pay a Self-Employment (SE) Tax. This Self-Employment Tax covers Social Security and Medicare benefits for the self-employed. Similar to the Social Security and Medicare taxes, this tax is also withheld from most employees’ paychecks. These payments contribute to the individual’s coverage under the social security system. Moreover, this system provides retirement, survivor, disability, and hospital insurance (Medicare) benefits. The following individuals must pay the SE tax. Then they must file the corresponding form if:

Update

Due to the Coronavirus, Aid, Relief and Economic Security Act (CARES), employers are allowed to defer their portion of Social Security taxes. Likewise, self-employed individuals are allowed to defer payment of certain self-employment taxes. The payroll tax deferral period began on March 27, 2020 and ended on December 31, 2020. Employers who received a PPP (Paycheck Protection Program) loan are entitled to defer this payment. Moreover, the employers can defer their share of Social Security tax even if the loan was forgiven. A tax professional can determine the appropriate application of the CARES Act to any business. Mistakes can be costly in time and money. Therefore, it is best to leave applications and calculations to the tax professionals.

As the COVID pandemic continues, the government is enacting laws and programs to help businesses and individuals. Tax professionals are keen in applying these laws to each individual and business for the best outcomes. The staff at Bullseye Tax Relief know what laws and rules apply to specific situations. Deadlines are important. Meeting them can make a difference. Call us today for a consultation.

Next Step

The calculation, withholding and depositing of the Federal Payroll Tax can be complex and complicated. Additionally, the processing of any taxes can also be stressful. This includes the Social Security and Medicare Tax, the Additional Medicare Tax, the Federal Unemployment Tax (FUTA) and the Self-Employment (SE) Tax. A tax expert can assist with these processes. This makes the reporting of these taxes accurate and complete. No need for stress. Give us a call today. Therefore, we can ensure the accurate withholding of these taxes and their reporting and depositing with the IRS. Visit our tax resolution page for more services.

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