Can a Trust Have Employees? What Trustees Need to Know
When a trust acts as an employer, the trustee assumes critical tax and legal obligations. Learn how to manage these duties and mitigate personal risk.
A trust can hire employees to carry out its purposes, such as managing assets, administering distributions, or performing other necessary tasks. The trustee, acting on behalf of the trust, becomes the legal employer. This relationship requires the trustee to adhere to federal and state employment laws, including tax withholding and reporting. Navigating these responsibilities is a component of the trustee’s administrative function and fiduciary duty to the trust and its beneficiaries.
Establishing the Trust as an Employer
Before a trustee can hire an employee, they must first confirm the trust instrument grants the authority to do so. This power may be explicitly stated or reasonably implied from the duties assigned to the trustee.
If the document permits hiring, the trustee must then establish the trust as a formal employer with the Internal Revenue Service (IRS). The primary action is to obtain an Employer Identification Number (EIN) for the trust. An EIN is a unique nine-digit number that the IRS uses to identify business entities, including trusts that have employees.
The trustee must complete and submit Form SS-4, Application for Employer Identification Number. This application requires information including the legal name of the trust, the name and Social Security Number of the trustee, the trust’s mailing address, and the date the trust was created. Obtaining the EIN is a prerequisite for all subsequent employer actions, such as opening a bank account for payroll and filing tax returns. Each trust requires its own unique EIN, even if the same individual serves as trustee for multiple trusts.
Ongoing Employer Responsibilities
Once the trust has an EIN and has hired an employee, the trustee must manage recurring payroll and tax obligations. A primary duty is the withholding of taxes from employee wages. These “trust fund taxes” include federal income tax, Social Security, and Medicare taxes (collectively known as FICA taxes). The amounts withheld are held in trust by the employer until they are remitted to the U.S. Treasury based on the employee’s Form W-4.
In addition to withholding employee taxes, the trust is responsible for paying its own share of taxes. This includes matching the employee’s Social Security and Medicare contributions and paying Federal Unemployment Tax (FUTA). These taxes must be deposited with the federal government according to a set schedule, which is typically either monthly or semi-weekly depending on the total tax liability.
The trustee must also file several recurring tax forms to report these wages and taxes. The trust must also comply with applicable state and local requirements, which often include state unemployment insurance and workers’ compensation insurance. Federal tax forms include:
- Form 941, Employer’s QUARTERLY Federal Tax Return, is used to report income taxes, Social Security, and Medicare taxes withheld from paychecks.
- Form 940 is filed annually to report and pay FUTA tax.
- Form W-2, Wage and Tax Statement, must be provided to each employee at the end of the year.
- Form W-3, Transmittal of Wage and Tax Statements, is filed with the Social Security Administration along with copies of Form W-2.
Trustee Fiduciary Duties and Liability
When a trust employs workers, the trustee’s fiduciary duties extend to all aspects of the employment relationship. This includes making prudent decisions regarding who to hire, setting reasonable compensation, and providing adequate supervision. These actions must be taken solely in the best interest of the trust and its beneficiaries.
A significant area of personal risk for a trustee involves the handling of payroll taxes. The IRS can hold a trustee personally liable for unpaid trust fund taxes through a mechanism called the Trust Fund Recovery Penalty (TFRP). This penalty applies if the trust withholds taxes from an employee’s wages but willfully fails to remit those funds to the government.
A trustee with authority over the trust’s finances and payment decisions is considered a “responsible person.” The penalty is equal to 100% of the unpaid tax and can be assessed against the trustee’s personal assets. This personal liability is not dischargeable in bankruptcy, highlighting the importance for trustees to meticulously manage and remit all payroll taxes.