- Instructor: Attorney Bob Schaller
- Lectures: 2
- Quizzes: 1
Trust Fund & Trust Fund Recovery Penalty.
Federal law requires employers to withhold certain taxes from their employees’ pay. Each time the employer pays wages, the employer must withhold – or deduct from the employees’ pay – certain amounts for federal income tax, Social Security tax, and Medicare tax. The withheld monies are called “Trust Fund” or Form 941 payments because the funds are held by the employer “in trust” for the IRS. See Form 941, Employer’s Quarterly Federal Tax Return.
These trust fund payments are not the property of the employer. Instead, these funds are the property of the employees. These trust fund payments are merely held by the employer as the trustee/fiduciary and must be forwarded by the employer to the IRS along with Form 941. IRM § 126.96.36.199.3(1) (01-18-2018). Upon receipt, the IRS credits the employees’ accounts in the amount of the payments withheld as payment of the employees’ tax liability.
Sometimes employers encounter financial difficulties and utilize these trust fund payments as “working capital” instead of tendering them to the IRS. In other words, the employers withhold the trust fund payments (almost always without the employees’ knowledge or consent) and use the payments to continue business operations. This is a reckless and short-sighted strategy since the financial difficulties frequently are merely postponed and not typically cured by usurping the trust fund payments. Plus, the trust fund payments now have been spent and the employer still owes the IRS an amount equal to the trust fund payments withheld from the employees.