Payroll taxes – 940 payments, 941 payments and more

First, it makes sense to clarify where the money comes from to make 940 and 941 tax payments. In fact, these payroll tax obligations are made up of two different revenue streams:

  1. The first stream consists of monies withheld from an employee’s check – the employee’s contribution to social security, Medicare and income tax withholding. These are also known as trust fund taxes or trust fund obligations. They are called that because the business – and the responsible parties/owners of the business –is withholding an employee’s share to be paid to the IRS. Therefore, the business and the responsible parties/owners have a fiduciary duty to make sure that these withholdings get to the IRS.
  2. The second stream of monies that make up 940 and 941 payments are known as employer matches. These funds are contributions made by each employer. The business is responsible for matching certain employee contributions.

Go to the IRS website for a complete description of trust fund taxes. Find a quick, helpful summary here.

If I can emphasize just one fact about trust fund taxes, it would be that it’s important to pay them on time to avoid steep fines. Unpaid taxes are subject to the Trust Fund Recovery Penalty (TFRP), which can be imposed upon the responsible parties/owners of a business who failed to deposit trust fund taxes with the IRS. This penalty can be painful – 100% of the calculated amount due.

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