What Is the Penalty for Late Payroll Tax Payment?

Payroll taxes are a fundamental component of the United States tax system, funding essential programs such as Social Security and Medicare. Employers are responsible for collecting these taxes from employee wages and remitting them to the Internal Revenue Service (IRS), along with their own contributions. This includes federal income tax withholding, Social Security and Medicare taxes (FICA), and Federal Unemployment Tax Act (FUTA) taxes. Ensuring timely and accurate payment of these payroll taxes is paramount for employers, as any delay or error can lead to significant financial penalties from the IRS.

Understanding Late Payroll Tax Payments

A payroll tax payment is considered late when it is not deposited by its designated due date. The IRS assigns employers a specific deposit schedule—either monthly or semi-weekly—based on their total tax liability during a “lookback period.” For monthly depositors, taxes are generally due by the 15th day of the following month. Semi-weekly depositors have more frequent deadlines, typically requiring deposits on Wednesday or Friday, depending on when payroll was processed.

Employers must deposit all payroll taxes electronically, usually through the Electronic Federal Tax Payment System (EFTPS). Failure to use electronic funds transfer can result in penalties. Regardless of the assigned schedule, if an employer accumulates $100,000 or more in tax liability on any single day, those funds must be deposited by the next business day.

Specific Penalties for Late Payments

The IRS imposes several penalties for late payroll tax payments, with the “Failure to Deposit” penalty being the most common. This penalty applies when employers do not deposit employment taxes on time, in the correct amount, or in the proper manner.

Employers may also face a “Failure to File” penalty for not submitting required payroll tax forms, such as Form 941 or Form 940, by their due dates. This penalty is distinct from the Failure to Deposit penalty and targets the late submission of the tax return itself. Accuracy-related penalties can also arise if incorrect reporting leads to a substantial understatement of tax liability.

The Trust Fund Recovery Penalty (TFRP) can be imposed on individuals responsible for collecting and paying over payroll taxes if they willfully fail to do so. This penalty can equal 100% of the unpaid trust fund taxes.

Calculating Late Payment Penalties

The calculation of late payroll tax penalties depends on the specific type of penalty incurred. For the Failure to Deposit penalty, the IRS uses a tiered system. The highest applicable rate is applied to the unpaid amount.

Failure to Deposit Penalty Calculation

• 2% of the unpaid deposit if 1 to 5 days late.
• 5% if 6 to 15 days late.
• 10% if more than 15 days late.
• 15% if unpaid more than 10 days after an IRS demand notice.

Failure to File Penalty Calculation

For the Failure to File penalty, the calculation is typically 5% of the unpaid tax for each month or part of a month that the return is late. This penalty is capped at a maximum of 25% of the unpaid tax. If both a Failure to File and a Failure to Pay penalty apply in the same month, the Failure to File penalty is reduced by the amount of the Failure to Pay penalty for that month, resulting in a combined monthly penalty of 5%. Interest is also charged on unpaid penalties, compounding daily, which further increases the total amount owed until the balance is fully paid.

Requesting Penalty Relief

Taxpayers may be able to request relief from payroll tax penalties under certain circumstances. Two primary avenues for penalty abatement are “First-Time Abatement” (FTA) and “Reasonable Cause.”

First-Time Abatement

First-Time Abatement is an administrative waiver available to taxpayers who have a clean compliance history for the three tax years prior to the penalty. To qualify for FTA, all required returns must have been filed, or an extension requested, and any tax due must have been paid or arrangements made for payment. This relief is typically a one-time consideration for penalties related to failure to file, failure to pay, and failure to deposit.

Reasonable Cause

Taxpayers can request penalty relief based on “Reasonable Cause,” which considers all facts and circumstances that prevented timely compliance. Examples include natural disasters, serious illness, death of an immediate family member, or inability to obtain necessary records. The IRS expects taxpayers to have exercised ordinary business care and prudence but were nevertheless unable to meet their tax obligations. To request relief, taxpayers generally submit a written statement or use Form 843, Claim for Refund and Request for Abatement, explaining the circumstances and providing any supporting documentation.