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

Employment Tax Issues and Relief

There are a variety of different potential employment tax issues, but don’t worry, there are several Employment Tax issue relief options as well. Here, at Bullseye Tax Relief, we specialize in Employment Tax relief and Payroll Tax relief solutions, so you’ve come to the right place!

In our previous blog posts in the Employment Tax mini-series, we discussed the two different kinds of employment tax and their components. For more information about Employment Tax, which applies to business owners who have 1 or more W2 employees, you can view our previous blog post on the subject, Employment Tax: What is it?. To learn more about Self-Employment Tax, which applies to freelancers, independent contractors, sole proprietors, and some single-member LLCs (depending on the state), check out our second blog post, Employment Tax: What is Self-Employment Tax?.

Common Employment Tax Issues

From missed payments to accounting errors, there are plenty of ways to wind up with employment tax issues. If you or your business are struggling with employment tax issues, you are not the first and you are not alone! Everyone makes mistakes, and that’s why the team of tax relief specialists at Bullseye Tax Relief is happy to help you and your business get back on track.

With that said, let’s look into some of the more common Employment Tax issues.

Failure to Issue the Proper Forms

Whether it’s a IRS Form W-2 for an employee or an IRS Form 1099 for an independent contractor, failure to issue these forms on time will result in penalties. Failing to issue the proper forms starts at $50 per employee (as of 10/18/2020), but increases over time, and can even incur additional fees and penalties if the forms are never sent. These fines, penalties and fees can accrue over time, leaving small businesses with serious employment tax issues.

Failure to Withhold and/or Pay Federal Taxes

As we discussed in the first blog post in the series, Employment Tax: What is it?, employers are required to withhold and match payroll taxes for their employees like federal income, Social Security and Medicare taxes. If an employer fails to pay these taxes that have been withheld to the IRS, they can be in serious trouble. Doing so will incur penalties and fines and in some cases, could even lead to criminal prosecution.

Late Employment Tax Payments

Just like the previous Employment Tax issue, the IRS doesn’t like it when they don’t get their money and they will charge your business fines and fees if payroll tax deposits are paid late. The fines and penalties for this error also increase over time, so it’s important to get a hold of any employment tax issues as soon as possible!

Employment Tax Issue Relief

The team at Bullseye Tax Relief are absolute experts at finding ways to negotiate with the IRS to help you and your business overcome any employment tax issues that might stand in your way. Send us an email or give us a call today to schedule a free consultation and transcript analysis.

 

What is Self-Employment Tax? | Call +1 844 582 3323

Employment Tax Issues and Relief | Call +1 844 582 3323

There are a variety of different potential employment tax issues, but don’t worry, there are several Employment Tax issue relief options as well. Here, at Bullseye Tax Relief, we specialize in Employment Tax relief and Payroll Tax relief solutions, so you’ve come to the right place!