As an employer, you’re no doubt aware of your obligation to submit payroll tax payments to the federal government. However, you may have more control of those payments than you’re aware. In recent guidance, Chief Counsel Advice 202129007, the IRS clarified when an employer may tell the tax agency how to apply — that is, “designate” — a payroll tax payment.
Trust-fund vs. non–trust-fund taxes
The U.S. tax code requires employers to withhold from wages paid to employees:
- Income taxes,
- Social Security taxes, and
- Medicare taxes.
These withheld taxes are referred to as “trust-fund taxes” because the employer holds them “in trust for the United States.” Employers are also required to pay their share of Social Security and Medicare taxes for employees. These employer taxes are called “non–trust-fund taxes” because the employer doesn’t hold these taxes in trust for the United States.
Both trust-fund and non–trust-fund taxes are commonly referred to as “payroll” or “employment” taxes.
Question and answer(s)
The IRS Chief Counsel’s guidance was prompted by the following question: Can a taxpayer designate a payroll tax payment to a specific liability, or must the payment be applied in the best interests of the government?
According to the guidance, an employer can designate a payment if:
- The payment is voluntary and not in response to an enforced collection, under which an employer has no right to designate payments, and
- At the time the payment is made, the employer provides the IRS with specific written instructions on how to apply it.
If the employer doesn’t designate a payment, the payment will be applied to serve the best interests of the government. In this situation, the best interests of the government require the IRS to apply the payment first to the taxpayer’s non–trust-fund tax liabilities for successive periods in descending order of priority.
If the payment exceeds the employer’s non–trust-fund liabilities, any excess is applied against the employer’s trust-fund tax liabilities. Examples of these include withheld income taxes and employees’ share of Social Security and Medicare taxes.
Once the trust-fund and non–trust-fund taxes are paid, any amount remaining will be applied to assessed fees and collection costs, assessed penalty and interest, and accrued penalty and interest to the date of payment.
Your best interests
There may indeed be instances when designating a payroll tax payment is in your best interests as an employer. We’d be happy to answer any questions you may have about payroll taxes, including whether and when to designate a payment.