What is a trust fund tax?

Trust fund taxes are payroll taxes withheld from employee wages that employers hold in trust for the government, including federal income tax and the employee portion of FICA. For professional service firm owners, trust fund taxes carry personal liability if not deposited properly.

Key characteristics

• Taxes withheld from employees

• Held in trust for the government

• Must be deposited on schedule

• Personal liability for non-payment

• Cannot be discharged in bankruptcy

• 100% penalty for willful failure

Why it matters for professional service firms

Trust fund taxes are not the company's money. Using them for other purposes creates personal liability that survives bankruptcy. Professional service firm owners must prioritize trust fund tax deposits above all other obligations.

Real-world example

Tom's firm faced cash problems and delayed payroll tax deposits to pay vendors. Over 4 months, accumulated $32,000 in unpaid trust fund taxes. The IRS assessed a trust fund recovery penalty personally against Tom. Even though the business eventually failed, Tom remained personally liable for $32,000 plus penalties. Lesson: never divert trust fund taxes regardless of cash pressure.