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What If My Business Cannot Afford to Pay Employment Taxes: The IRS Trust Fund

You own a small business with a few employees. Business has been great in the past; but this month has not produced as much income as you wanted. Payroll is coming up soon. You are now faced with a dilemma; there is not enough money to cover the employees’ pay and the employment taxes. You think “if I don’t pay the employees, they will quit and I will have to deal with the department of labor.” So you choose to pay the employees now and pay the taxes later. Let’s say that business continues to decline and you have yet to pay the past due employment taxes. What’s going to happen to you and your business?

Employment taxes are amounts that are required to be withheld from employees’ wages and paid over to the federal government. An employer must withhold income, social security, Medicare, and unemployment taxes on any wages paid. In addition, the business has to match the employee’s social security and Medicare withholdings. Once these amounts are withheld, they are required to be deposited and reported to the IRS.

The amounts withheld from an employees pay are called trust fund taxes. They are called trust fund taxes because you actually hold the employee’s money in trust for the government. If these amounts are not promptly deposited or paid, the IRS can assess the Trust Fund Recovery Penalty (TFRP). The TFRP is assessed personally against any person who is responsible for collecting or paying withheld employment taxes, and who willfully fails to collect or pay the taxes. The amount of the penalty is equal to the unpaid balance of the trust fund taxes.

The IRS will conduct an interview with the owners/officers of the business to determine who is responsible for collecting and paying withheld employment taxes. If they determine that you are a responsible person, you will first receive a letter stating its intention to assess the TFRP against you. You have 60 days to appeal the decision. If you do not respond, then the TFRP will be assessed against you and collection action will begin against your personal assets.

If you are a business owner with unpaid employment taxes, please contact a tax professional immediately. For more information about this article, please contact us.

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