Payroll tax penalties are different from ordinary tax penalties in a few important ways: they are triggered by the calendar, they stack across several different failures, and they come with serious consequences for responsible individuals. This guide covers the penalties themselves and how relief works. For the personal liability side, see payroll tax problems.
Four different things can go wrong
- 1Depositing the taxes late (or not at all).
- 2Filing the quarterly Form 941 or annual Form 940 late.
- 3Filing the return but not paying the balance due.
- 4Filing a return with wrong amounts or missing information.
The failure-to-deposit penalty
This is the penalty most employers encounter first. According to the IRS, it is a percentage of the unpaid deposit, based on how many calendar days late the deposit is, counted from its due date:
- 1 to 5 days late: 2%.
- 6 to 15 days late: 5%.
- More than 15 days late: 10%.
- More than 10 days after your first notice (for example CP220), or the day you receive an immediate-payment notice (for example CP504J): 15%.
The IRS says these penalties do not add up. When a higher tier applies, it replaces the lower one. A deposit that is more than 15 days late carries a total penalty of 10%, not 17%. Interest is charged on penalties until the balance is paid in full.
A worked example
Suppose a required deposit of $8,000 is made 12 days late. It falls in the 6-to-15-day tier, so the penalty is 5% of the unpaid deposit, or $400, plus interest. If the same deposit were not made for 30 days, the tier becomes 10%, or $800. And if the IRS sent a notice and the deposit stayed unpaid more than 10 days afterward, the rate would rise to 15%, or $1,200. These figures illustrate the arithmetic and are not a forecast for any particular employer.
Late filing and late payment penalties
Separate from deposits, a late Form 941 or 940 can draw a failure-to-file penalty, and an unpaid balance on the return can draw a failure-to-pay penalty, each calculated as a percentage of the tax per month or part of a month, subject to caps, with interest on top. The rates and caps are set out in the IRS instructions, and we do not restate them here beyond saying they accumulate over time. See Form 941 filing help.
Trust fund exposure
If trust fund taxes (withheld income tax and the employee share of Social Security and Medicare) are not paid over, the IRS can pursue responsible individuals through the Trust Fund Recovery Penalty. That is a separate, personal assessment, covered in payroll tax problems.
How to ask for relief
- Reasonable cause: the IRS says it may remove or reduce penalties if you acted in good faith and can show reasonable cause. Interest can only be removed or reduced if the penalty is.
- Unbanked relief: the IRS describes a procedure for employers who could not open a bank account, with a signed, dated bank statement less than 2 years old and a letter describing efforts to get an account.
- Payment plan: paying what you can and applying for a payment plan may reduce future penalties.
- Dispute: call the number on your notice or write a letter with supporting documents.
- First-time abatement: may be available if your compliance history is clean. See IRS penalty abatement help.
What a strong relief request includes
- 1The notice number, tax periods, and penalty amounts being disputed.
- 2A clear, factual explanation of what happened and when.
- 3Evidence: records of illness, disaster, lost records, or provider error, with dates.
- 4A description of what you did to fix it once the problem ended.
- 5Proof that you are current on filings and deposits now.
How to avoid penalties going forward
- Know your deposit schedule and calendar every due date.
- Make deposits through EFTPS or your payroll provider, and confirm they posted.
- Use a payroll service that files and deposits for you, but verify through your IRS online account. See small business payroll services.
- Never use withheld taxes to cover operating expenses.
- Reconcile payroll to your books each quarter.
If you already owe penalties and a balance, see IRS payment plans for small business owners. Our payroll service keeps deposits and filings on schedule, and our IRS resolution service can help with penalties already assessed. To talk about your payroll requirements, bring your notices and tax periods.
