Payroll or employment taxes are comprised of the employer portion and the employee portion. The employer is required to withhold the employee portion from the employee’s pay check and remit it to the IRS.
The Trust Fund Portion of Payroll Taxes is Never Dischargeable.
The employee paid portion of the payroll tax includes the 6.2% social security tax and the 1.45% Medicare tax. The employee portion of the tax is referred to as a "trust fund" tax because the employer is collecting the employee paid portion of the payroll tax from the employee in the capacity of a trustee for the IRS. Trust fund taxes are never dischargeable in bankruptcy. A Chapter 13 plan must provide for full payment of all trust fund recovery taxes in order to be confirmed. There is no escape from trust fund recovery taxes. The tax will become uncollectible if the 10 year statute of limitations expires without the IRS filing suit, regardless of whether the taxpayer files bankruptcy or not.
The Employer Portion of Payroll Taxes is Dischargeable - Sometimes.
The employer portion of the payroll tax is the tax which the employer owes directly to the IRS. The employer portion includes the employer's obligation to match the employee's 6.2% social security tax and the 1.45% Medicare tax. The employer portion of the employment tax can be discharged if (1) more than three years pass between the date the 941 tax return was last due, including extensions and the date that the bankruptcy was filed; (2) more than two years pass between the date the 941 tax return was filed and the date the bankruptcy case was filed; and (3) the taxpayer did not willfully evade payment of the tax.
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