The funds withheld from an employee’s paycheck and remitted to the IRS on a monthly or quarterly basis cannot be used for any other business expense under any circumstances.
What it means: These funds are referred to as the Trust Fund tax, and do not belong to your business – you are holding them in trust for the IRS.
- Use these funds to pay the associated taxes as soon as they are due, and for nothing else.
- If these taxes are not paid on time, the IRS will pursue these funds aggressively.
Keep in mind: The liability protection of LLCs and corporate entities does not shield business owners from liability regarding the Trust Fund tax.
- In the case of a Trust Fund tax deficiency, the IRS will conduct a series of interviews with business employees to determine liability.
- Any individual with spending authority for a business can be held liable, regardless of their position in the corporate hierarchy.
- Each individual is held jointly and severally liable for the collective debt, meaning that each individual is held liable for the full amount rather than a proportional share of it.
What to do: Collect these funds in a separate bank account and leave them alone.
- Plan your expenses assuming these funds do not exist, because they belong to the IRS from the moment they are collected.
- Should you find yourself in a collections issue with the IRS, do not ignore their communications – engage with the agent for your case and figure out a solution.