Payroll Tax and Trust Fund Recovery Penalty
Employers have tax duties owed to their employees, the state, and to the IRS associated with their payroll. Employers are responsible for reporting, collecting and depositing employment taxes with state and federal authorities. Employers have a responsibility to manage their wage earner employees’ withholdings by withholding taxes as instructed by the employee and submitting these taxes to the IRS and the state, if applicable. Employers must also regularly report income paid to 1099 earners and wage earners. Federal payroll tax includes social security and Medicare taxes. An employer is responsible for paying half of a wage earner’s social security and Medicare taxes, what is now 7.65% of a given employee’s gross income. 1099 earners are responsible for paying all of their own social security and Medicare taxes, what is now 15.3% of gross income. An employer withholds employee taxes in trust for its employees. If an employer fails to report, collect, and pay payroll taxes, they violate their duty to submit employee’s tax payments and may become subject to a Trust Fund Recovery Penalty. This is a personal assessment of tax liability made against an officer or owner who was responsible for submitting payroll taxes on behalf of the business.
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Assessment of the Trust Fund Recovery Penalty is conducted by a Revenue Officer (“RO”). There are several factors that a Revenue Officer must consider before assessing this type of penalty against any and all officers of the business. The RO conducts a face-to-face meeting with all potential responsible parties and interviews them using the guidelines of IRS Form 4180. It is important for an officer of a corporation to understand their responsibilities and rights in order to challenge this assessment, if a challenge is warranted. After the RO conducts the interview, they will issue a “Proposed Trust Fund Recovery Assessment” on IRS Form 2751. At this stage, the taxpayer has a right to appeal the proposed assessment. If the taxpayer does not appeal on time, the proposed assessment becomes final and a bill is sent to the responsible individual to begin the collecting process. We have reversed Trust Fund Assessments on numerous occasions where clients have exceeded the time frame to appeal the Trust Fund Assessment.