What is a trust fund for employers and businesses?

Trust funds are special bank accounts in which the beneficiary of the funds in the account is different from the executor of the account. It is essentially a pool of money held in an account for a specific use, such as social security or unemployment tax. 

Trust fund taxes are income taxes, social security taxes and Medicare taxes you withhold from the wages of an employee as their employer. The taxes are called trust fund taxes because they are held in trust until they are paid to the Treasury

As their employer, you have the added responsibility of withholding taxes from their paychecks. You must pay your employees’ trust fund taxes along with your matching share of social security and Medicare tax to the Treasury through the Federal Tax Deposit System. When you pay your employees, you do not pay them all the money they earned. The income tax, employee share of social security tax and the employee share of Medicare tax that you withhold from the pay of your employees are part of their wages you pay to the Treasury instead of to your employees.

To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP. These taxes are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.

Who Can Be Responsible for the TFRP

The TFRP may be assessed against any person who:

• Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
• Willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

• An officer or an employee of a corporation,
• A member or employee of a partnership,
• A corporate director or shareholder,
• A member of a board of trustees of a nonprofit organization,
• Another person with authority and control over funds to direct their disbursement,
• Another corporation or third party payer,
• Payroll Service Providers (PSP) or responsible parties within a PSP
• Professional Employer Organizations (PEO) or responsible parties within a PEO, or
• Responsible parties within the common law employer (client of PSP/PEO).

For willfulness to exist, the responsible person:

• Must have been, or should have been, aware of the outstanding taxes and
• Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.