Trust Fund Taxes In Bankruptcy

Bankruptcy treats trust fund taxes as a special case:  the tax has a priority for payment and is not dischargeable in bankruptcy.

Trust fund taxes, sometimes called payroll taxes, are the portion of an employee’s paycheck that the employer withholds for payment of the employee’s tax obligations.

This withholding is different than the tax that the employer pays as the employer’s contribution to FICA (Social Security.)  The trust fund portion of payroll taxes really involve the employee’s money, not the employer’s money.

Because the employer is taking control of the employee’s money for the employee’s taxes, the employer is treated as a fiduciary for those funds.

If the employer withholds the money from the paycheck but doesn’t turn it over to the correct taxing authority, the government treats the failure as akin to theft.

Responsible person liability

A corporate officer is not generally personally liable for the debts of the corporation.

Trust fund tax liability is an exception: the corporate officers or agents who could have and should have paid the funds to the taxing authorities are held personally liable for the taxes.

Liability for trust fund taxes is not dischargeable regardless of the age of the tax. Chapter 13 is often a good choice for individuals who have been assessed for trust fund tax liability, as it can provide an interest free repayment plan over the life of the Chapter 13 case.

Distinguish the trust fund portion of the tax from the employer’s portion of various taxes:  the employer’s portion of employment taxes can be discharged if it is not a priority tax or a trust fund tax.

Under the law of some states, sales taxes are also trust fund taxes.  In other states they are excise taxes. (California adopts the excise tax approach).

Excise taxes become dischargeable with time;  trust fund taxes do not.

More about taxes in bankruptcy
About the Author
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.