08 Mar 17 Boxelder Consulting
Estimated Reading Time: 5 Minutes
As a business owner, whether small or large, you have an obligation to withhold money from your employees’ paychecks for Medicare and Social Security taxes. This is no small matter. The IRS holds you (the employer) accountable to collect these trust fund taxes on a monthly or quarterly basis. An easy way to think of this is that the federal government “trusts” that you will deposit the funds in the treasury account. In order to avoid any future issues with the law, this is what you need to know about trust fund liability.
Tax Liability: Trust or Bust
The law requires an employer to withhold FICA and income taxes when they pay a wage or salary to an employee. The withheld funds are the trust taxes, which business owners report to the IRS using Form 941. The employer holds this money “in trust” on behalf of the employee for payment of income tax, social security, and Medicare.
For owners, borrowing money from withholding trust accounts may sound enticing to make ends meet in the short-term. However, it can become dangerous, risky, and illegal. If the business fails to replenish these funds, the employer (and other “responsible persons”) can be held liable for the failure to pay the trust fund taxes.
Piercing the Corporate Veil: Trust Fund Recovery
Since the IRS considers corporations as a separate entity, their shareholders are not held personally responsible if there is a lawsuit. The “corporate veil” protects them. This is a situation in which the court sets aside limited liability and holds a corporation’s shareholders or directors liable for its actions or debts.
However, there are exceptions to this protection should the corporation fail to uphold their end of the agreement.
The willful failure to pay trust fund taxes is one of these exceptions and is therefore referred to as “piercing the corporate veil.” In such cases, the IRS lifts this veil and no longer protects the businesses officers in charge. The IRS will personally hold all “responsible persons” liable to a lawsuit.
It is important to note the common misconception that only corporate officers or managers shoulder the burden of liability. That is simply false. The next section provides an in-depth look into what defines a responsible person.
Trust Fund Penalty & Responsible Persons
The law may impose liability upon responsible persons for trust fund taxes. Responsible persons may include directors, officers, bookkeepers, and others named on the employer’s bank account signature card.
These are people with actual authority in the business, who may face an IRS Trust Fund Penalty Interview. This is a meeting with an IRS agent to discuss the debt.
The IRS may consider anyone who makes financial decisions within the corporation as a responsible person, and they can be liable for the trust fund taxes. This may include office managers or secretaries responsible for signing checks and making FTDs. If a responsible person chooses to pay other creditors instead of the IRS with prior knowledge that their taxes are due, it is a willful failure to pay trust fund taxes. In turn, the responsible person will be accountable for the violation.
The Certainty of Trust Fund Liability
Trust fund liability is a grave matter. As a struggling business, withholding trust accounts may seem like a plausible option for quick cash when times are rough. In the end, the risks greatly outweigh the reward. There are significant penalties for failing to pay trust fund taxes.
Boxelder Consulting can provide the experienced guidance you need when navigating the legal grounds of Trust Fund liability. Call today for a trusted team of tax professionals to calm your concerns, and clarify the legalities of your business ventures.