It’s my annual Taxes from A to Z series! This time, it’s Tax Cuts and Jobs Act (TCJA) style. If you’re wondering whether you can claim home office expenses or whether to deduct a capital loss under the new law, you won’t want to miss a single letter.
T is for Trust Fund Taxes.
Despite the glamorous-sounding name, trust fund taxes aren’t those paid by the super-rich like the Hiltons and the Kardashians. Instead, the term refers to taxes that are collected by a third party, like a store owner or an employer, and paid over to the government on your behalf.
You pay trust fund taxes all of the time; you just might not realize it. Those payroll taxes which are withheld from your paycheck? Those are trust fund taxes. Here’s how it works.
Together, Social Security and Medicare taxes are known as FICA (Federal Insurance Contributions Act) taxes and are taken out of your paycheck.
(Taxes on self-employment income are separately referred to as Self-Employment Contributions Act taxes, or SECA taxes, since self-employed persons pay both the employee and employer contributions.)
If you’re employed, you pay Social Security tax (6.2%) as the employee and your employer also pays the same rate of tax (6.2%).
Unlike Medicare, Social Security taxes are subject to a wage cap. In other words, you pay Social Security taxes on your earnings until you hit a magic number. After that, your wages are no longer subject to Social Security taxes. For 2018, that magic number was $128,400. That means that whether you made $1,000 or $100,000, you paid Social Security taxes on that income. But if you earned $128,401? You paid Social Security taxes on $128,400, but not on the extra dollar. And if you earned $1,128,400? You paid Social Security taxes on $128,400 but not on the extra million.
In contrast, all wages are subject to Medicare taxes. If you’re employed, you pay Medicare tax (1.45%) as the employee, and your employer kicks in tax at the same rate (1.45%). And, thanks to a change in the law that took effect in 2014, high-income taxpayers are subject to a Medicare surtax (0.9%) tacked on to wages that exceed $200,000, or $250,000 for married taxpayers.
Your employer pays its share of FICA taxes out of its own pocket. But your share? Your employer collects those Social Security and Medicare payments and remits them to the government on your behalf. These taxes are sometimes referred to as “trust fund” taxes since they come out of your check and are held separately by your employer until they’re paid to the tax authorities. The money doesn’t belong to your employer. It never did. It was your money first (when it was your wages or salary), and it’s credited to you for Social Security and other purposes when paid over to the government.
Your employer has a legal obligation to make the remittance. If your employer doesn’t pay over those taxes, there are serious consequences. For example, a trust fund recovery penalty may apply. The penalty is 100% of the unpaid trust fund tax. That’s right, 100%. And if your employer can’t pay over the trust fund taxes immediately, the trust fund recovery penalty may be imposed on those persons the IRS deems responsible for collecting, accounting or paying the tax. That means that the liability becomes personal (as opposed to a business liability) and isn’t easily discharged.
Even more serious? Those employers and responsible persons who fail to pay over trust fund taxes may be criminally charged. Sentences can result in restitution and jail time.
Of course, this article focuses on specific trust fund taxes related to payroll for federal tax purposes. Additional trust fund taxes may exist on the state and local levels, and aren’t restricted to payroll. Sales and use taxes, for example, are considered trust fund taxes collected from consumers.
If you collect taxes and are tasked with remitting those to tax authorities, pay careful attention to rules and deadlines. Keep excellent records and make prompt payments. My recommendation? Consider a payroll company to record and remit payments on your behalf. You can read more about payroll companies and paying business taxes on time here.
For more Taxes From A To ZTM 2019, check out the rest of the series:
- A is for Alimony
- B is for Bracket Creep
- C is for Credit For The Elderly Or The Disabled
- D is for Due Dates
- E is for Earned Income Tax Credit (EITC)
- F is for Fair Debt Collection Practices Act (FDCPA)
- G is for Gross Estate
- H is for Home Office Deduction
- I is for Innocent Spouse
- J is for Jackpot
- K is for Kiddie Tax
- L is for Long-Term Capital Gains or Losses
- M is for Medical Expenses
- N is for Notice
- O is for Opportunity Zone
- P is for Pass-Through Deduction
- Q is for Qualified Business Income
- R is for Real Estate Investment Trust
- S is for Security Deposit