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An employer has an obligation to withhold trust funds taxes from their employees’ paychecks and remit them to the Treasury Department on behalf of the employee. Before the employer pays the Treasury Department, the taxes are held in trust, thus giving them the name trust fund taxes. Employees will see these taxes on their pay stubs. However, the failure to remit these funds to the government may result in a trust fund recovery penalty for the responsible party.
Get in touch with our well-versed tax lawyer to discuss your role in managing trust fund taxes in Washington DC.
An employer is required to withhold three different types of taxes. One is the income taxes that go directly from the employee to the government. There is also the Social Security tax, half of which comes from the employer and half comes from the employee, both at 6.2%. Finally, there are Medicare taxes, half from the employer and half from the employee, both at 1.45%. That is a total of 15.3% of the employee’s wages being withheld by the employer for the benefit of the employee.
Those funds are all remitted over to the government and the half that comes from the employer are called the trust fund taxes. Additionally, the District of Columbia has another level, where the business is required to withhold income tax (from the employee), plus sales tax (from the customer), and they must remit all of it.
A business pays trust fund taxes on a Form 941, Employer’s Quarterly Federal Tax Return every three months, with due dates on April 30th, July 31st, October 31st, and January 31st. Depending on the taxes reported on this form, the payments are either due monthly (if the payments are under $50,000) or every other week (if over $50,000 of employment taxes was withheld over the last four quarters). In Washington DC, a business is required to file an FR 900Q quarterly or an FR 900A annually.
Unfortunately, businesses fail to remit trust fund taxes very often, especially because it can take years before the IRS begins enforcement. The IRS collects about 95% of the total federal revenues that are used to run the country, and the employment taxes represent approximately 70% of all revenue collected by the IRS. Every year, billions of dollars of employment taxes that are reported to the IRS are not paid.
Similarly, billions of dollars in employment taxes are not paid and not even reported on tax returns. A lot of small businesses think that if the IRS does not come knocking on their door the next day, then that means the IRS has not caught them or has not noticed. The truth is, the IRS just operates slowly, and when they come to collect the owed taxes, they will be very aggressive.
The trust fund recovery penalty is for a willful or intentional failure to pay the trust fund taxes. The responsible party must make a good faith attempt at withholding the correct amount and timely paying it to the government. This may include setting up a system around payroll and point-of-sale to ensure the proper amount of withholding is going to the government, with detailed records of that timely filing of the required forms. If the business is unsure whether they are withholding the correct amount, they are encouraged to contact a tax attorney.
If the IRS believes a business is withholding or underpaying trust fund taxes or improperly withholding taxes, it may start an investigation. The revenue agent assigned to the case will request various documents to answer these questions.
If an employee can document that the trust fund taxes are being withheld, usually in the form of pay stubs or W2 forms, they will not be liable for the payment. Employees would only be at risk if they were designated as the responsible party and were willful in the failure to collect and remit trust fund taxes.
Employers must always withhold and remit trust fund taxes to the U.S. government or risk a penalty. If you are facing this penalty, please call us to discuss how to come into compliance for your trust fund taxes in Washington DC.
Pontius Tax Law, PLLC is a tax law firm that strives to resolve sensitive tax problems through trust, dedication and value. The law firm was founded by John Pontius with offices in Washington, DC, Rockville, MD, Bethesda, MD, Fairfax, VA, and Alexandria, VA. Mr. Pontius represents individual and business clients with sensitive and serious tax matters before the Internal Revenue Service and state taxing authorities. His client base is local, national, and international.
Over the course of his career, Mr. Pontius has represented businesses and individuals with complex tax issues in the following areas: FBAR examinations, offshore and domestic disclosures, FATCA, FIRPTA, tax planning, unfiled tax returns, release of tax liens and levies, trust fund recovery penalty, IRS and state audit examinations, as well as appeals, penalty abatement, U.S. Tax Court litigation, along with defense of tax fraud and evasion. If you require assistance from a tax lawyer, contact Mr. Pontius to discuss your situation.
