Handling payroll taxes properly is of great importance
If you have employees, then you’re required to collect payroll taxes. Independent contractors aren’t employees, so you’re usually not required to collect taxes from them. However, for employees, you’ll need to collect federal and state taxes, local taxes, and other types of taxes that may be levied. You may also be required to contribute to both federal and state unemployment taxes, disability insurance, and more depending on your business and your state. These monies are to be set aside each pay period and deposited on a regular schedule that’s dictated by the federal and state agencies.
Trust Fund Taxes
Tax money that’s collected from employees is referred to as trust fund taxes. Both federal and state agencies consider it your fiduciary responsibility to hold these monies in a trust fund and remit them timely to the appropriate authority. Failure to do so can have serious consequences including fines, penalties, and jail time. If the IRS has audited your business and discovered missing payroll taxes, then you can expect serious consequences. They may make allowance for natural disasters or similar, especially if you have a record of timely payments, but you shouldn’t rely on their lenience.
Failure to deposit payroll taxes in a timely manner is a serious violation of your fiduciary responsibility as well as federal and state law, and you may be assessed a trust fund recovery penalty, or TFRP.
What’s the Trust Recovery Penalty (TFRP)?
The TFRP is levied against those responsible persons who willfully neglect to collect or pay taxes collected from employees. Responsible persons are defined as those who:
- Should have have been aware of the liability
- Intentionally disregarded their fiduciary responsibility, or
- Were indifferent to their fiduciary responsibility
Responsible persons can include officers, partners, board members, third-party payers such as a payroll service or those who can sign checks. Using payroll tax funds to pay debts is considered a willful disregard of fiduciary responsibility, especially when other funds aren’t available. This can show malicious intent and obligate the individual to personal responsibility for the funds, in addition to jail time for violating the law. Indifference to fiduciary responsibility doesn’t automatically indicate malicious intent but it is a violation of the law nevertheless.
What Is the TFRP Procedure?
If you’re assessed a TFRP, then the IRS will notify you via the U.S. Postal Service and you’ll have 60 days to appeal the proposed penalty. If you don’t appeal, then the penalty will be assessed and immediate payment will be demanded. Upon assessment of the penalty, the IRS may commence collection actions, which can include liens, levies, and seizures of assets.
How Much Is the TFRP?
TFRP penalty assessments are usually equal to the amount of the taxes owed, including the employer’s half of FICA and Medicare, and you’ll still owe the payroll taxes. Sometimes, fines and administrative assessments can substantially increase the total of the TFRP.
Is There a Statute Of Limitations?
The IRS has three years to assess the penalty and up to 10 years to collect it.
How Do I Avoid A TFRP?
The best method for avoiding a TFRP is to always pay your payroll taxes timely. Plan ahead for cash flow shortages with lines of credit or other types of temporary cash so that you don’t need to borrow from your payroll taxes. Invest the tax monies in a three-month certificate of deposit or another type of untouchable account if self-discipline is an issue. If you’re in this situation, then an excellent first step is to contact an attorney who specializes in this area.
Written by: AnnaBeth Rouse