Every month your employer has to hold back a certain percentage from your paycheck. They have to withhold 6.2% for social security and 1.45% for Medicare. The IRS calls the withholding of income tax, Medicare, and social security the trust fund taxes. An employer is supposed to send the trust fund taxes amount to the IRS every quarter using Form 941.
The IRS imposes a penalty on employers called the Trust Fund Recovery Penalty when an employer fails to send to the IRS the income tax, Medicare, and Social Security amount it held from an employee’s paycheck. An employer is supposed to send the IRS amount every quarter. Meaning the first quarter of the year ending March 31 should be submitted by April 30, the second quarter ending June 30 should be submitted by July 31, the third quarter ending September 30 should be submitted by October 31, and the fourth quarter ending December 31 should be submitted by January 31 of the new year.
Who can be Penalized by the Trust Fund Recovery Penalty?
Under the IRS, section 6672(a), an individual can be held personally liable for a penalty for the willful failure to collect, account for, and pay the IRS the employment taxes of a business. This is called trust fund recovery penalty. If the IRS finds that you are personally liable for the taxes the penalty is the amount of the unpaid trust fund tax plus interest.
The trust fund recovery penalty allows the IRS to impose liability on a person who is (1) responsible and (2) who willfully failed to provide the taxes to the IRS. A person is responsible if they have a duty to collect or pay employment taxes. This person can be an officer/member or employee of a corporation or partnership. It can really be anyone who is responsible for collecting or paying the taxes. It can be one person or 10, there is no limit. The person must also willfully fail to collect, account for, or pay the employment taxes. For willfulness to exist, the responsible person has to have been or should have been aware of the outstanding tax and either intentionally or voluntarily disregard the law.
The IRS has three years to assess the trust fund penalty to companies. Their time starts on April 15 after the year the trust fund taxes were due to be filed. For example, let’s say a company was supposed to pay in October 2018, the IRS has three years from April 15, 2019 to assess the penalty and 10 years to collect the debt.
