What are trust taxes?

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At my Middleburg, FL office, the biggest mistake I see small businesses make is using trust taxes as short-term loans to aid cash flow in their business. What are trust taxes and why is it a mistake to use them? Trust taxes are typically sales tax and payroll tax that you collect from your customers or employees and then remit to the government on their behalf. They are called “trust taxes” because you are collecting and holding them “in trust” for the government. Basically--it is never your money.

The problem comes when it is crunch time and the business needs to pay an important vendor but money is tight. The account balance shows there is enough money but most of that is payroll taxes that are due in about a week. The owner of the business may think, ‘Next week sales will be better, and I can make it up’ and then decide to pay that important vendor. This gets out of hand quickly if next week’s sales aren’t better. The problem begins snowballing and the business quickly digs a hole they see no hope of getting out of.

The IRS will not only assess the business with taxes and penalties, they will also go after the owners of the business or anyone who was able to make payments or decide who gets paid. They assess a penalty of 100% of the trust taxes that are owed on each of those people personally.

Don’t go down that road. If you find yourself with a cash flow problem, go to the bank and get a loan. If the bank will not give the business a loan, then it is time to look at the viability of the business. Why is it operating at a loss? Why isn’t there enough cash to meet expenses? What changes can I make to prevent this? Do I need to lay off workers? Those questions and more are going to help you fix the problem permanently, even if that means shutting down the business. “Borrowing” the trust taxes you’ve collected from the government will cost you far more than you ever gain from it and could potentially result in criminal prosecution.

If you have any questions about your trust taxes or any other IRS issue, please contact my Middleburg office at 904-600-3450. 

Angela Yonge
Enrolled Agent
Acorn Bookkeeping & Tax, LLC
904-600-3450
Location: Middleburg, FL 32068, USA

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