When you pay your employees, you don’t pay them all the money they earned. The federal income tax and employees’ share of social security and Medicare taxes that you withhold from your employees’ paychecks are part of their wages that you pay to the U.S. Treasury instead of to your employees. Your employees “trust” that you will pay the withheld taxes to the U.S. Treasury by making federal tax deposits. This is the reason that these withheld taxes are called “trust fund taxes.”
If federal income, social security, or Medicare taxes that must be withheld aren’t either 1) withheld or 2) deposited or paid to the U.S. Treasury, the government can charge a very serious penalty called the Trust Fund Recovery Penalty (TFRP). If you are looking at an IRS Account Transcript for your SSN (or a tax lien), you may see notations for Civil Penalty, CIV-PEN, or 6672 Penalty. To get a better understanding of trust-fund taxes, you should also understand non-trust fund taxes.
What Are Non-Trust Fund Taxes?
Employers must match their employees’ Social Security and Medicare contributions. Those matching amounts are considered non-trust fund taxes. The IRS typically only holds a business responsible for non-trust fund taxes if they aren’t paid to the government. It does not hold individuals responsible. However, the exact liability rules depend on your business structure. If the business is “self-employed” or the sole principal of an LLC, a person may be held personally responsible for both trust-fund and non-trust fund taxes.
How Much Is the Trust Fund Recovery Penalty Amount?
The Tax Fund Recovery Penalty is not small. In fact, it is eq