Payroll withholdings are the taxes and benefits paid by the employee. They are called trust fund taxes because technically the money you withdraw and hold onto is not yours, it is the governments. To help ensure that taxpayers properly remit payroll taxes to the IRS, they impose a penalty on any person who is responsible for paying payroll taxes and willfully fails to do so. This is known as the trust fund recovery penalty (TFRP). Typically, the TFRP equals the amount of money the employer withheld from employees’ wages (e.g., Social Security, Medicare, and income taxes) that was not remitted to the IRS.
What exactly do you need to pay to them?
The IRS has a way of taking even the simplest information and making it hard to understand, so we'll break it down. You are expected to hold onto and pay quarterly:
- Employee portion of Social Security tax – 6.2 percent
- Employee portion of Medicare tax – 1.45 percent (a 0.9 percent Medicare surtax when the employee earns over $200,000)
- Federal income tax
- State income tax
The law also requires you to pay the employer’s portion or non-trust fund taxes of these two taxes:
- a 6.2 percent Social Security tax
- a 1.45 percent Medicare tax (the “regular” Medicare tax)
There are a few different ways you could find out that you have payroll tax debt issues:
- If you are the one responsible for paying the taxes, then you’ll probably know pretty quickly if you have a cash flow problem and are unable to make the payments.
- Perhaps a Revenue Officer shows up at your place of business to tell you live and in person
- Or maybe, all of a sudden your bank account is levied. While you’re not the one responsible for making the payment, you did see the money leaving your account and assumed your employee in charge of the books was sending regular payments to the IRS.
You may ask, “But wouldn’t the IRS first send out letters to me to tell me about the issue?” Yes — but if those letters never make it into your hands you’ll never know. That is, until the IRS comes to visit.
What to expect
An IRS Trust Fund Assessment will most likely occur. This is when an IRS Revenue Officer comes to your place of business to interview those responsible for paying the quarterly payroll taxes. This may not be you! This is because of the Trust Fund Recovery Penalty (or "TFRP"). It is a penalty imposed by the IRS on businesses that fail to pay employment taxes as required by law and makes corporate officers or LLC members personally liable for the taxes.
The IRS will determine responsibility for the payroll trust fund recovery penalty by first reviewing bank signature cards and signatures on canceled checks, and then conducting interviews with those believed to have responsibility for the unpaid taxes. Unfortunately, the IRS seems to think the most important piece of evidence is that signature card, but that’s not always the case! If you are being assessed, the IRS needs to know the whole story of your business — not just the short-sighted, easy story.
The Revenue Officer is going to assess who is responsible, but ultimately the company may be responsible for paying the money back (the trust fund portion of the payroll taxes). They have to think in terms of "collect-ability"…what is going to give them the best chance of getting their money? In the case of embezzlement, it is much easier to negotiate with the IRS — be it an Offer in Compromise, Installment Agreement, etc.
You can have legal representation with you at your interview, and it’s important to do so. They will help to tell the IRS your story, making sure not to leave any gaps. If there are gaps, the IRS will fill them in with bits that benefit them, not you. We also know for a fact that those taxpayers that show up with legal representation are treated differently than those who try to brave it alone. And when we say 'differently', we mean 'better'.
IRS Form 4180
This is the form that the IRS Revenue Officer will bring to the interview; they will interrogate (okay, it's a strong word, but it's true) you and fill it out. Oddly, the IRS does not list Form 4180 on their site…
It's worth your due diligence to explore all avenues before agreeing to anything with the IRS. If you need assistance, contact us. We can help. Call us at 888-727-8796 or email firstname.lastname@example.org. Any information you provide will be kept confidential. We can help you resolve your tax issue, and get your business set up for future success.