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Payroll Tax and the Trust Fund Recovery Penalty

September 4, 2014

In most work situations, employers withhold their employees’ payroll taxes. You’ll notice when you receive your paycheck that the gross pay is significantly different from your take home pay. Part of this difference is payroll taxes. The law requires employers to withhold these taxes from their employees’ pay and then transfer these taxes to the IRS.

These taxes are income and employment taxes such as Social Security taxes, additional Social Security taxes, state income tax, local taxes, excise taxes, and railroad retirement taxes, and are sometimes referred to as ‘trust fund taxes’. As the name suggests, these taxes are kept in a trust until they’re transferred to the government. In an effort to encourage individuals to provide payroll taxes on time, the Trust Fund Recovery Penalty (TFRP) was put in place.

The TFRP is charged if unpaid trust fund taxes cannot be collected from a business. The TFRP is assessed whether or not the business is still operating. The TFRP can be charged against anybody who:

  • Is responsible for collecting or paying income and employment taxes withheld from employee pay, or for paying collected excise taxes, and
  • Willfully fails to collect or pay them.

A person responsible for withholding taxes and paying them can be:

  • An officer or an employee of a corporation
  • A member or employee of a partnership
  • A corporate director or shareholder
  • A member of a board of trustees of a nonprofit organization
  • Another person with authority and control over funds to direct their disbursement
  • Another corporation or third party payer
  • Payroll Service Providers (PSP) or responsible parties within a PSP
  • Professional Employer Organizations (PEO) or responsible parties within a PEO, or
  • Responsible parties within the common law employer (client of PSP/PEO).

A person who is negligent is liable for non-compliance; intent is irrelevant.

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