Trust Fund Taxes
A trust fund tax is money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury.
When you pay your employees, you do not pay them all the money they earned. As their employer, you have the added responsibility of withholding taxes from their paychecks. The income tax and employees' share of FICA (social security and Medicare) that you withhold from your employees' paychecks are part of their wages you pay to the Treasury instead of to your employees. Your employees trust that you pay the withholding to the Treasury by making Federal Tax Deposits (PDF). That is why they are called trust fund taxes.
Through this withholding, your employees pay their contributions toward retirement benefits (social security and Medicare) and the income taxes reported on their tax returns. Your employees' trust fund taxes, along with your matching share of FICA, are paid to the Treasury through the Federal Tax Deposit System. The withheld part of these taxes is your employees' money, and the matching portion is their retirement benefit. For additional information, refer to Employment Taxes and the Trust Fund Recovery Penalty (TFRP).
Employment tax deposits are a current expense. Postponing paying them is not the same as making a late payment on your phone bill or to a supplier. Congress has established large penalties for delays in turning over your employment taxes to the Treasury. The longer it takes to pay that money, the more it will cost you. For more information, refer to Publication 15, Circular E, Employer's Tax Guide.
Payments to Withholding Foreign Trusts
If you are making payments to a Withholding Foreign Trust (WT), you do not have to withhold if the WT is acting in that capacity. The WT must assume NRA withholding responsibility for amounts (subject to NRA withholding) that are distributed to, or included in the distributive share of, any direct beneficiary or owner. The WT must withhold the amount required to be withheld. A WT must provide you with a Form W–8IMY that certifies that the WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. The Form W–8IMY must contain the WT-EIN.
Responsibilities of WT
The WT must withhold on the date it makes a distribution of an amount subject to NRA withholding to a direct foreign beneficiary or owner. If the beneficiary's or owner's distributive share has not been distributed, the WT must withhold on the beneficiary's or owner's distributive share on the earlier of the date that the trust must mail or otherwise provide to the beneficiary or owner a Schedule K–1 (Form 1041) or the due date for furnishing the statement (whether or not the WT is required to furnish the statement).
The WT may determine the amount of withholding based on a reasonable estimate of the beneficiary's or owner´s distributive share of income subject to withholding for the year. The WT must correct the estimated withholding to reflect the actual distributive share on the earlier of the dates mentioned in the preceding paragraph. If that date is after the due date for filing the WT's Forms 1042 and 1042–S (including extensions) for the calendar year, the WT may withhold and report any adjustments in the following calendar year.
Form 1042 Filing
The WT must file Form 1042 even if no amount was withheld. In addition to the information that is required for the Form 1042, the WT must attach a statement showing the amounts of any over- or under-withholding adjustments and an explanation of those adjustments.
Form 1042–S Reporting
A WT can elect to report payments made to its direct beneficiaries or owner on a pooled basis rather than reporting payments to each direct beneficiary or owner. This election must be made when the WT withholding agreement is executed with the IRS. If the election was not made, the WT must file separate Forms 1042–S for each direct beneficiary or owner whose distributive share included an amount subject to NRA withholding.
Smaller Partnerships and Trusts
Under a special rule, a WT that has made a pooled reporting election can treat partners of certain smaller partnerships and beneficiaries or owners of certain smaller trusts as direct beneficiaries or owners. These rules only apply to a partnership or trust that meets the following conditions.
It is a foreign partnership or foreign simple or grantor trust.
It is a direct partner, beneficiary, or owner of the WT.
It does not have any partner, beneficiary, or owner that is a U.S. person or a pass- through partner, beneficiary, or owner.
For more information on applying these rules, see section 10.01 of the WT agreement found in Revenue Procedure 2003-64. Refer also to Revenue Procedure 2004-21.
Related Partnerships and Trusts
Under a special rule, a WT that has made a pooled reporting election can treat direct partners of certain related partnerships and direct beneficiaries or owners of certain related trusts as direct beneficiaries or owners. These rules only apply to a partnership or trust that meets the following conditions.
It is a foreign partnership or foreign simple or grantor trust.
It is either:
A direct beneficiary or owner of the WT, or
An indirect beneficiary or owner of the WT that is a partner, beneficiary, or owner of a partnership or trust to which the WP has applied this rule.
It has the WT as a general partner of the partnership or a trustee of the trust.
For more information on applying these rules, see section 10.02 of the WP agreement found in Revenue Procedure 2003-64. Refer also to Revenue Procedure 2004-21.
Not Acting as WT
A foreign trust that is not acting as a WT is a nonwithholding foreign trust. This occurs if a WT is not acting in that capacity for some or all of the amounts it receives from you. Also, a WT generally is a nonwithholding foreign trust for amounts distributed to, or included in the distributive share of, pass-through beneficiaries or owners or indirect beneficiaries or owners.
Generally, you must treat payments made to a nonwithholding foreign trust as made to the beneficiaries of a simple trust or the owners of a grantor trust. The trust must provide you with a Form W–8IMY (with Part VI completed), a withholding statement identifying the amounts, the withholding certificates or documentary evidence of the beneficiaries or owners, and the information shown earlier under Withholding statement under Nonqualified Intermediaries.
Source: IRS, http://www.irs.gov/businesses/small/article/0,,id=98830,00.html