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Trust Fund Taxes

A trust fund tax is money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury.

When you pay your employees, you do not pay them all the money they earned. As their employer, you have the added responsibility of withholding taxes from their paychecks. The income tax and employees' share of FICA (social security and Medicare) that you withhold from your employees' paychecks are part of their wages you pay to the Treasury instead of to your employees. Your employees trust that you pay the withholding to the Treasury by making Federal Tax Deposits (PDF). That is why they are called trust fund taxes.

Through this withholding, your employees pay their contributions toward retirement benefits (social security and Medicare) and the income taxes reported on their tax returns. Your employees' trust fund taxes, along with your matching share of FICA, are paid to the Treasury through the Federal Tax Deposit System. The withheld part of these taxes is your employees' money, and the matching portion is their retirement benefit. For additional information, refer to Employment Taxes and the Trust Fund Recovery Penalty (TFRP).

Employment tax deposits are a current expense. Postponing paying them is not the same as making a late payment on your phone bill or to a supplier. Congress has established large penalties for delays in turning over your employment taxes to the Treasury. The longer it takes to pay that money, the more it will cost you. For more information, refer to Publication 15, Circular E, Employer's Tax Guide.

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Page Last Reviewed or Updated: 13-Aug-2014