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WEBEL LAW, PLLC
535 Fifth Avenue, Floor 4
New York, New York 10017
(646) 373-1055
EMPLOYMENT TAXES
WHY PAYING EMPLOYMENT TAXES MATTERS?
The IRS and state tax authorities aggressively pursue the delinquent payment of Employment taxes. If you clicked on the Employment Tax link before you clicked any of the other Tax links, you probably need professional advice from a tax attorney as you may be at risk of being personally liable under the Trust Fund Recovery Penalty. We help taxpayers who are delinquent in paying Employement Taxes. Call us to discuss your tax problem.
WHAT ARE FEDERAL EMPLOYMENT TAXES?
Tax terms related to employment are not specifically defined, so some confusion is imminent. Employment Taxes are also known as Payroll Taxes or
Trust Fund Taxes. Regardless of the term used, generally, the following taxes—and various state equivalents—fall under the generic
term Employment Taxes:
- Federal Insurance Contribution Act (FICA)
- Federal Unemployment Tax Act (FUTA)
- Additional Medicare Tax ($200,000+ employees only)
- Withheld Federal Income Tax
FEDERAL INSURANCE CONTRIBUTION ACT (FICA). FICA taxes include two taxes, two tax rates, and two taxpayers who must contribute money to their payments. The two
FICA taxes are the Social Security tax and the Medicare tax. FICA taxes apply only to the taxpayer's income below a certain wage ceiling,
which changes over time.
FICA's SOCIAL SECURITY TAX. FICA's "federal survivors, old age, and disability insurance tax" funds the employee's federal retirement, disability, or children's
support insurance known as Social Security. The Social Security tax rate is 12.4%, of which half is paid by the employee (6.2%) and half by the employer (6.2%).
The more Social Security tax collected in the taxpayer's name over their work-life, the higher their Social Security benefits should be.
FICA's MEDICARE TAX. FICA's "hospitalization tax" funds the taxpayer's Medicare benefits. The Medicare tax rate is 2.9%, of which half is paid by the
employee (1.45%) and half by the employer (1.45%).
For both FICA taxes, the employee's half—a combined 7.65%—is withheld from their paycheck by the employer "in trust," who is responsible for forwarding the
money to the IRS semi-weekly or monthly.
ADDITIONAL MEDICARE TAX. For employees earning over $200,000 per year, an Additional Medicare Tax is paid half by both the employee and the employer.
FEDERAL UNEMPLOYMENT TAX ACT (FUTA). FUTA requires employers to pay a tax based on the number of employees and their unemployment rate. These taxes are for the
employee's benefit, but the employer is solely responsible for funding and paying the FUTA taxes, not the employee.
WITHHELD INCOME TAX. Income Tax is only an Employment Tax while the withheld sums of money are held "in trust" by the employer.
WHAT ARE TRUST FUND TAXES?
Trust Fund Taxes is not an official term but generally means the amounts of money employers withhold from employees' paychecks, which includes the withheld
income tax and half the FICA taxes. IRS Form 941 uses the term Payroll Taxes. Employers hold this money "in trust," regardless of the term, before turning it over to
the IRS. Employers are held to a high standard because it's not their money, and a failure to turn it over to the IRS can have huge consequences for the innocent taxpayer
for whom the money is being held.
The employer's share of the FICA taxes is not considered to be Trust Fund Taxes because the money is not being held for another party. Instead, that half of the FICA
taxes, along with FUTA taxes, is the employer's responsibility to pay.
WHY ARE TRUST FUND TAXES IMPORTANT?
First, because the tax withheld is not the employer's money. It's being held "in trust" for the employee.
Second, because that's a lot of money. It's just sitting in the bank, earning little interest. And the employer has bills that need to be paid. During cash-tight
periods, employers do what they must to make payroll, pay the rent, keep the lights on, etc. The day-to-day financial strains of businesses are tough, and that's a
lot of money just sitting there. Sometimes, the withheld money is too tempting.
Usually, no one ever knows the withheld funds were touched because the employer finds a way to come up with the cash to pay the IRS timely. However, sometimes the
cash flow dries up, and the withheld money can't be replaced in time.
When money withheld from employees' paychecks never reaches the IRS, sooner or later, an investigation begins. That's when the Trust Fund Penalty becomes a problem
for someone.
EMPLOYER'S TAX RESPONSIBILITIES
- Withhold & Pay Income Taxes
- Withhold & Pay FICA Taxes
- Withhold & Pay Additional Medicare Taxes
- Pay Employer's FICA Taxes
- Pay Employer's Additional Medicare Taxes
- Pay Unemployment Taxes
- File IRS Form 941 and State's Version
WHAT IS THE TRUST FUND RECOVERY PENALTY?
The Trust Fund Recovery Penalty is similar and different from other IRS penalties. To encourage taxpayers to pay their taxes, the IRS assesses a
penalty on the responsible taxpayer when a tax is paid late or not at all. Most IRS penalties are harsh, but none are as harsh as the Trust Fund Recovery
Penalty. Whereas most IRS penalties are single or low double-digit percentages, the Trust Fund Recovery Penalty is triple digits at 100%. That means the
penalty is equal to taxes withheld from employees' paychecks to be forwarded to the IRS. The IRS views withholding money from an employee's paycheck
and not forwarding it to the IRS as Theft, so the person responsible is held liable for all money taken.
The Trust Fund Recovery Penalty does not include the employer's share of employment taxes due.
WHO CAN BE HELD LIABLE FOR THE TRUST FUND RECOVERY PENALTY?
The Trust Fund Recovery Penalty is not held against the taxpayer for whose benefit the money was withheld to be forwarded to the IRS. Instead, the 100% penalty is assessed against the person or persons responsible for withholding the money from employees' paychecks and willfully evading or attempting to evade the tax by not forwarding the money to the IRS. Call us now if you haven't turned over employee withholdings to the IRS.
DOES A LIMITED LIABILITY ENTITY SHIELD A PERSON FROM THE TRUST FUND RECOVERY PENALTY?
No, the corporate structure of the employer is irrelevant. Being an entity with limited liability, such as a corporation or limited liability company, does not shield anyone from liability. The entity is not the target of the Trust Fund Recovery Penalty law. The individual or individuals in charge of the entity are targeted. Furthermore, the entity itself remains liable for its actions, including failure to forward withheld tax money. However, the owners of the corporation or limited liability company are not personally liable as long as they are not the person responsible for withholding the funds and forwarding them to the IRS.
DOES BEING A SOLO PROPRIETOR OR PARTNERSHIP SHEILD A PERSON FROM THE TRUST FUND RECOVERY PENALTY?
In a way, but there's more to it. The Trust Fund Recovery Penalty does not apply to Sole Proprietors and Partnerships because those owners are automatically and directly liable for all actions by their business, including failing to forward tax withholdings from employees' paychecks. Therefore, the Trust Fund Recovery Penalty isn't needed to make sole proprietors and partners responsible. They're automatically responsible.
ARE EMPLOYEES SHIELDED FROM THE TRUST FUND RECOVERY PENALTY?
Generally, employees are not responsible for the actions of their employer. However, an employee who's acting independently and alone, not under someone's control, whose job status, duties, and authorities include withholding funds from employees' paychecks and submitting the money to the IRS, can be held liable under the Trust Fund Recovery Penalty for willfully evading or attempting to evade the tax by not sending the money to the IRS. Other crimes may also be involved. The IRS looks at the level of control a person has over a business's finances. Employees involved in a business's finances should seek legal counsel once it appears that a business is not paying trust taxes.
ENFORCING THE TRUST FUND RECOVERY PENALTY
When enforcing the Trust Fund Penalty, the IRS looks at the facts and circumstances of each case individually. Specifically, they are looking for a
responsible person with the duty or power to direct someone to withhold money from employees' paychecks and then be accountable for and authority to pay or not
pay the money to the IRS. The IRS looks for the person with authority and responsibility to exercise independent judgment over the business's financial affairs.
The IRS looks for a willful, knowing, voluntary, intentional, deliberate, and reckless act. A mistaken omission or accident is not enough. The act does not require a
bad motive or evil intent either. Instead, the person must have known or should have known, about the withheld taxes and continued to ignore the law or was indifferent
to its requirements based upon the standard of a reasonable person.
Anyone managing a business who should have been aware, or were aware, that the withheld taxes were not being submitted to the IRS may be found to be willful and
responsible and may be found to be personally liable under the Trust Fund Recovery Penalty.
