What Is the Penalty for Paying Payroll Taxes Late?

Employers have a fundamental responsibility to manage payroll taxes, which include funds withheld from employee wages and direct business contributions. Timely payment and accurate reporting are essential. Failure to meet these obligations can result in penalties from tax authorities, increasing an employer’s tax liability.

Understanding Payroll Tax Obligations

Payroll taxes include federal income tax withholding, Social Security, and Medicare taxes (FICA taxes). Employers also pay Federal Unemployment Tax Act (FUTA) taxes, which fund state unemployment insurance programs.

The IRS sets specific due dates for depositing these taxes, varying based on an employer’s tax liability during a lookback period. Most employers follow a monthly or semi-weekly deposit schedule. Monthly depositors remit taxes by the 15th day of the following month if their total tax liability for the lookback period was $50,000 or less.

Semi-weekly depositors have more frequent deadlines based on the payroll date. If payroll is paid Wednesday through Friday, the deposit is due by the following Wednesday. For payroll paid Saturday through Tuesday, the deposit is due by the following Friday. An accelerated deposit rule applies if an employer accumulates $100,000 or more in payroll taxes on any day, requiring deposit by the next business day.

Employers also have reporting obligations, such as filing Form 941, Employer’s Quarterly Federal Tax Return, and Form 940, Employer’s Annual Federal Unemployment Tax Return. Form 941 is due quarterly by the last day of the month following the end of each quarter. Form 940 is due annually by January 31 of the following year.

Types of Late Payment Penalties

The IRS imposes penalties for employers who do not meet payroll tax responsibilities. One common penalty is the Failure to Deposit (FTD) penalty, applied when employers do not deposit payroll taxes on time, in the correct amount, or in the required manner. This penalty applies to withheld income tax, Social Security, Medicare, and FUTA taxes.

Another penalty is the Failure to Pay penalty, which occurs when a taxpayer does not pay the tax liability by the due date, even if the return was filed. The Failure to File penalty is assessed when required payroll tax forms, such as Form 941 or Form 940, are not submitted by their due dates. Accuracy-related penalties can also be assessed for substantial understatement of tax or underpayments resulting from negligence or disregard of rules.

Penalty Calculation Methods

Payroll tax penalties are calculated based on the type of non-compliance. The Failure to Deposit penalty uses a tiered structure based on how late the deposit is:
One to five calendar days late: 2% of the unpaid amount.
Six to fifteen calendar days late: 5% of the unpaid amount.
More than fifteen calendar days late: 10% of the unpaid amount.
Unpaid more than ten days after an IRS demand notice (e.g., CP504J): 15% of the unpaid amount.
The highest applicable percentage is applied, not cumulative amounts.

The Failure to Pay penalty is 0.5% of the unpaid taxes for each month or part of a month the tax remains unpaid, up to a maximum of 25%. If an installment agreement is in place, this rate may decrease to 0.25% per month. However, if the tax remains unpaid ten days after an IRS notice of intent to levy, the rate can increase to 1% per month.

For the Failure to File penalty, the rate is 5% of the unpaid taxes for each month or part of a month the return is late, also with a maximum accumulation of 25%. If both Failure to File and Failure to Pay penalties apply in the same month, the Failure to File penalty is reduced by the amount of the Failure to Pay penalty, resulting in a combined monthly penalty of 5%.

Addressing Assessed Penalties

Upon receiving an IRS penalty notice, such as a CP14 or CP161, review is necessary. These notices detail the amount owed, including taxes, penalties, and interest, and provide a due date. Ignoring such notices can lead to additional penalties, interest, and collection actions.

If the penalty assessment is accurate, pay the amount due by the specified deadline to prevent further interest and penalties. If an employer believes the penalty was assessed in error or due to circumstances beyond their control, penalty abatement may be possible. Reasonable cause can be a basis for abatement, such as serious illness or natural disasters that prevented timely compliance.

The IRS offers a First-Time Abatement (FTA) program for certain penalties, including Failure to File, Failure to Pay, and Failure to Deposit penalties. To qualify for FTA, an employer needs a clean compliance history for the preceding three tax years, meaning no prior penalties or previous penalties were abated. A request for abatement can be made by calling the IRS or submitting a written statement or Form 843.

If an employer cannot pay the full tax and penalty amount immediately, installment agreements are available. An Express Installment Agreement is an option for businesses owing $25,000 or less in payroll taxes, allowing up to 24 months for repayment without extensive financial disclosure. For larger amounts or longer payment periods, a more comprehensive financial review may be required.