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Payroll Penalty

Restaurant Payroll Tax Problems

Congress passed a new law that is designed to provide for the Trust Fund Recovery Penalty, encouraging on-time payments from those in the restaurant industry facing payroll tax problems. These payments may come in the form of employment tax, withheld income, social security tax, collected excise tax, railroad retirement tax, etc. The collective term for these payments is often labelled as Trust Fund Recovery Penalty – TFRP – as the money is held in a trust until the tax deposit is made. If the restaurant business cannot immediately provide the trust fund taxes, the TFRP may apply, although it is not necessary for the restaurant in question to shut down amidst TFRP assessment. 

Who is responsible for the Trust Fund Recovery Penalty within the restaurant industry?

  1. The person who is in charge of collecting/paying withheld tax, such as employment or income. 
  2. The person who is in charge of the payment of excise taxes.
  3. The person who purposefully refuses to pay/collect

Who should be in charge of Payroll to Avoid Payroll Tax Problems in your Restaurant?

You should ideally choose a trustworthy person or a trusted group of people, as they will be in charge of paying, accounting, and collecting these trust fund taxes. They should also be In terms of who the person is within the restaurant/company; you should choose an employee with a strong operations background, as his experience with industry specific issues such as tip reporting, cash and inventory.

  1. Corporation employee
  2. Corporation officer
  3. Corporate director
  4. Corporate shareholder
  5. Member of board of trustees
  6. Third party 
  7. Payroll Service Provider
  8. Professional Employer Organizations
  9. A client of the PSP or PEO

What does willfulness to refuse payment mean?

The person in question must be or have been aware of the taxes when they were outstanding and must have intentionally ignored the law/requirements. Choosing to pay another creditor when claiming that the restaurant cannot pay employment tax also comes under this definition of willfulness. 

The Interview – 

In some cases, you may be contacted and asked to take part in an interview. This is designed to determine your responsibilities with regards to the taxes. It will then be adjudged whether you exercised your own judgement with regards to the restaurant financials. For example, you will not be labelled as responsible if you were simply following orders from a superior. 

In order to gain a greater understanding of the TFRP, including penalties and payroll outsourcing, check out the following PDF:

Notice 784, Could You be Personally Liable for Certain Unpaid Federal Taxes?

Calculating the penalty amount – TFRP

The total penalty amount will equal the unpaid trust fund tax balance and is calculated using the withheld unpaid income taxes and the employee share of the denied FICA taxes. In the case of collected taxes, the total penalty amount is based on the total unpaid collected excise taxes.

Trust Fund Recovery Penalty Assessment – 

If you are adjudged to be responsible:

You will receive a letter of notification regarding the TFRP assessment. You will then have 60 days from the date on said letter to appeal, the rights of which will be explained within the letter text. The appeals process can also be found HERE. If you do not respond within the 60 days, the penalty will be assessed and you will eventually receive a demand for payment. Failure to pay the penalty may result in a collection of assets. 

Avoiding the Trust Fund Recovery Penalty –

Of course, the only way to avoid the TFRP is to ensure that all taxes are collected and paid on time to the Internal Revenue Service. Additional information on the employer tax guide can be found HERE, or the quarterly tax return HERE.

 

If you are currently receiving letters from the IRS regarding your payroll tax, submit your case for evaluation here.

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