If you’re a business owner or executive, timely payroll tax deposits are a key part of federal tax compliance. This involves submitting Form 941 on a quarterly basis and making all required deposits. Any error in this process—paying the wrong amount, paying too late, or depositing incorrectly—can result in a penalty.
These penalties can cause severe financial distress for businesses, particularly those with tight profit margins that may already struggle to meet their financial obligations. It’s critical to stay compliant with payroll regulations if you want to avoid penalties or other consequences.
If you have questions or concerns, consider consulting with a tax pro who is well-versed in IRS payroll tax requirements. To get assistance now, contact us at the Wiggam Law Group.
Key Takeaways:
- All employers have a set deposit schedule for payroll taxes.
- Late deposit penalties are 2 to 10% of the tax due.
- Failure to pay payroll taxes may lead to a Trust Fund Recovery Penalty of 100%.
What is the IRS Failure to Deposit Penalty?
The IRS will impose a failure to deposit penalty when a business does not deposit the full amount of payroll taxes due in the correct manner or on time. Depending on your deposit schedule, you must make your deposit monthly, semi-weekly, or even next-day in some cases. Then, you report the numbers quarterly on Form 941.
Note that some very small employers only pay payroll taxes once per year, and they file Form 943. Typically, you make this election when you get your EIN, which only applies to employers who pay less than $1,000 in payroll tax for the year.
Which Payroll Taxes Are Involved?
This penalty applies to all payroll taxes that businesses are required to collect from employees and pass to the government, including federal income tax withholdings, Social Security taxes, and Medicare taxes. It also includes the employer’s portion of Social Security and Medicare taxes.
Common Reasons Businesses Incur This Penalty
There are several reasons that businesses find themselves hit with the failure to deposit penalty, including:
- Cash flow issues: This is a serious sign of financial issues for a business. If a business uses money set aside for payroll tax deposits to cover vendor payments, loans, or other expenses, it often does not bring in enough money to “make up” for the payroll taxes they spent. Then, when those payroll taxes are due, they are unable to make their deposit.
- Mismanagement of funds: Mismanagement of company funds is also a red flag, but it can be remedied. A company that does not keep thorough financial records, does not separate funds in a way that’s easy to track their purpose, or otherwise muddles their finances may occasionally find themselves unable to pay their payroll taxes.
- Misunderstanding deposit schedules: Payroll tax rules can be complicated, particularly when a company doesn’t have an on-staff accountant to handle these tricky regulations. It’s easy to get behind if you don’t know your due date.
How the Failure to Deposit Penalty is Calculated
The amount you’re charged for the failure to deposit penalty depends on how late you are. Note that this is based on calendar days, not business days. If you are one to five days late, the penalty is 2% of the unpaid amount.
This increases to 5% for a payment that is six to fifteen days late and 10% for a payment that is more than fifteen days late. If your payment is more than ten days after your first notice, the penalty is 15%.
Interest
Interest is charged on all accrued penalties until the debt is paid in full. Interest generally starts accruing on the initial due date. Interest rates are reassessed every three months. As of the first quarter of 2025, the interest rate for underpayment is 7%. If you are a large corporation, the interest is 9%. Interest compounds daily.
How Penalties and Interest Can Add Up
It’s easy to see how penalties and interest can rapidly add up, putting your business further and further behind with the IRS. Imagine a business that failed to deposit $15,000 of payroll taxes on the due date. They finally catch up 20 days after the initial payment was due, incurring a 10% penalty of $1,500.
For 20 days, interest compounds. By the 20th on the debt day, you have accrued over $50 in interest. In total, that’s nearly $1600 in unnecessary fees for making a late deposit. This often has a snowball effect; when a business is late on one deposit, the time spent catching up often puts them even further behind when it’s time to make their next deposit. This continues until they are ultimately unable to pay at all.
Common Scenarios Leading to 941 Late Payment Penalties
There are several scenarios that routinely put businesses behind on their employment tax deposits.
Misclassification
A surprising number of businesses misclassify their employees as independent contractors. They may genuinely misunderstand the differences between employees and independent contractors or intentionally misclassify them to save money on employee taxes and benefits illegally.
When misclassification is discovered, and the employee alerts the appropriate agencies—including the IRS—the employer has to pay their share of employment taxes, as they should have been collecting them the entire time. The IRS may backdate penalties and interest. The amount due can add up quickly, especially if the business misclassified multiple employees.
Payroll Tax Calculation Errors
Payroll tax calculations are straightforward, but miscalculations happen. Failing to include hours, using the wrong numbers to calculate the amount due for each type of tax, or forgetting to include the correct period of time in your calculations can all lead to underpayments, late deposits, and costly penalties.
Cash Flow Constraints
Cash flow issues are one of the most common reasons for missed deposits. When companies “borrow” from money set aside for tax payments to cover more pressing expenses, they are taking a huge risk. The odds are good that they will have the same financial issues when the deposit is due and will be unable to make the full deposit.
Failure to Follow Deposit Schedule
Businesses generally deposit their employment taxes either monthly or semi-weekly, with some exceptions. A handful of businesses must make deposits daily whenever they incur $100,000 or more in taxes on any day in a standard deposit period.
The schedule you follow is based on calculations made prior to the start of the calendar year. Misunderstanding your deposit schedule and depositing less often than you need to mean missing deposits and incurring penalties for each missed date.
Notices You May Receive From the IRS
The IRS notifies businesses when they have missed a deposit date. You may receive several notices alerting you to your missed deposit:
- CP161 informs you that you have a balance for unpaid payroll taxes.
- CP276B notifies you of the late deposit penalty you’ll need to pay if you continue to miss payments or make late payments. Essentially, the letter lets you know that they could charge a deposit penalty but chose not to do so this time.
- Letter 1153 informs you that the IRS plans to impose the Trust Fund Recovery Penalty against officers, owners, and certain employees responsible for depositing the payroll taxes.
What to Do If the IRS Contacts You
If you have the money to get caught up on your employment taxes, you can do so immediately upon receiving the first or second notice. In both cases, you may be able to avoid the penalty by doing so. However, it’s important to note that the IRS is unlikely to waive additional penalties going forward.
In CP276B, they encourage you to look into your tax documents and financial records to figure out why you are missing deposit dates so you can rectify the situation. You can also consult a tax attorney at this point if you are concerned about getting caught up.
Upon receiving Letter 1153, you should absolutely talk to an attorney as soon as possible. The letter gives you ten days to attempt to resolve the matter. It also gives you 60 days to send a written appeal to the IRS. When the IRS assesses the Trust Fund Recovery Penalty, it charges those who are considered to be responsible for the business’s payroll taxes. If you do not wish to be held personally liable for however much your company owes, you must talk to an attorney and make other arrangements with the IRS.
Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty can be imposed on any person who the IRS considers responsible for collecting or paying payroll taxes and willfully fails to do so. People in this category may include officers and employees of corporations, members of partnerships, corporate directors, shareholders, a member of a board or trustees, or a payroll service provider, among others.
The penalty amount is equal to the unpaid income taxes withheld plus the employee’s part of the withheld FICA taxes. If you do not resolve the issue, the IRS can and will take aggressive collection actions against your personal assets, including wages, bank accounts, and personal property. It is crucial to address unpaid employment taxes immediately to avoid the situation escalating to the point of a Trust Fund Recovery Penalty.
How to Resolve Failure to Deposit Penalties
There are several ways you can resolve your failure to deposit penalties and unpaid employment taxes:
- Paying in full: By paying in full immediately, the business can settle the issue and avoid any further penalties or interest accruing.
- Requesting penalty abatement: Penalty abatement is an option in some cases. First-time penalty abatement may be granted to taxpayers who have previously been compliant with all IRS regulations and who have not had penalties assessed in recent years. Even if first-time abatement is not an option, you may be entitled to reasonable cause penalty abatement if you have a legitimate reason for missing the deposit—for example, a natural disaster or serious illness.
- Installment agreement: You may be able to set up an installment agreement to pay back your taxes and penalty. An In-Business Trust Fund Express Installment Agreement allows those who owe less than $25,000 to set up a payment plan that pays the amount due in 24 months or less. If you owe between $10,000 and $25,000, you must set up a Direct Debit Installment Agreement. Those who owe more than $25,000 can begin the process of requesting an installment agreement by filling out Form 433-B and contacting the IRS directly.
- Offer in Compromise: You may be able to settle the outstanding liability through an Offer in Compromise based on Doubt as to Collectibility. This option is available to businesses who can demonstrate they are unable to pay the outstanding liability in full through liquidating assets and/or through a payment plan. The IRS will request financial information and decide regarding the business’s ability to pay the debt. The business must remain current with all tax payment requirements, including federal tax deposits, or the IRS will consider a settlement.
- Currently Not Collectible: If the business is unable to make payments towards the outstanding liability due to financial hardship, the IRS may place the account in Currently Not Collectible status. When the IRS does so, they do not require the business to make any payments towards the outstanding liability, although they encourage businesses to make voluntary payments. They also agree to refrain from levying any assets or attempt further collection for a period, generally one to two years. After this point, they may ask for updated financial information to see if the business’ situation has improved. The IRS will file a Federal Tax Lien on any tax period with an outstanding balance in exchange for agreeing to place the account in Currently Not Collectible. This option can allow businesses that are struggling to get current and stay current on their current-year tax deposits before tackling the outstanding debt.
- Appealing the penalty: If you believe the penalty was assessed in error, you may be able to appeal it and have it removed.
Preventing Future Payroll Tax Penalties
Once you have squared away your current missed deposit issue, you must take steps to avoid future failure to deposit penalties. These penalties can be a massive hit to your business’s financial stability, and with careful planning, you can abide by all filing and payment requirements in the future.
Before the start of each calendar year, look at your business’s financials from the year to determine whether you are on a monthly or semiweekly payment schedule.
The Electronic Federal Tax Payment System allows for timely deposits. While you can also pay via direct pay or your business’s tax account, the EFTPS will enable you to schedule payments up to one year in advance, view your payment history, receive email notifications about your payments, and get direct assistance from customer service agents.
You may also want to look into a payroll service if you find yourself overwhelmed by your company’s payroll needs. At some point, a growing business’s payroll demands will exceed a business owner’s knowledge or time. When that happens, a reliable payroll service can take care of timely employee payments and tax deposits.
However, even relatively basic payroll software can be a huge help. In addition to crunching all the numbers for you, a lot of payroll software will set aside your tax payments, make the deposits, and file the returns for you.
Some businesses also find it helpful to set up a tax reserve. This separates your employment taxes from other business funds to ensure that you have the money available whenever a deposit is due.
Consequences of Ignoring Payroll Tax Penalties
You may face a number of consequences for ignoring the IRS’s communications and attempts to collect your payroll taxes. First, the penalties and interest will continue adding up until you address the situation. If the IRS is unsuccessful at securing payment via other means, they may move on to levies, liens, and garnishments—all of which can put a significant damper on your business’s operations and overall stability. Should these collection efforts also be unsuccessful, you could personally get hit with the Trust Fund Recovery Penalty and find your personal assets in danger.
The IRS can also bring criminal charges against individuals who intentionally fail to pay payroll taxes. Therefore, it is very important to address outstanding payroll taxes promptly and seek the help of an attorney or tax professional as soon as the problems arise.
When It’s Time to Seek Professional Assistance
There are several signs that you may be in over your head and require professional assistance with your payroll tax concerns:
- You have missed deposits more than once or been hit with significant penalties. Missing one deposit may result from a busy work week, a new change in personnel, or a personal issue. But when you miss multiple deposits or find yourself getting penalties time and time again, you may have a larger issue on your hands. In this case, talking to a tax attorney should be your next step.
- The IRS has sent notices regarding aggressive collection actions. The IRS pursues enforced collection actions when taxpayers are unresponsive to earlier notices and letters. At this point, you should talk to a tax attorney to avoid having your business or personal assets seized.
- You have cash flow issues that are keeping you from paying your taxes. This is a huge red flag that even greater tax issues are on the horizon if you don’t change course. By addressing the situation now, you may be able to avoid even worse outcomes for your business.
Tax lawyers, CPAs, or payroll services can help you in several ways. A tax attorney may help you negotiate a payment plan, appeal the assessed penalties, or request penalty abatement. A CPA may provide you with a tax plan that automates payments and ensures you have the cash needed to make payments on time. You may enjoy automated and automatic payroll tax payments with a payroll service.
IRS Failure to Deposit Penalty Frequently Asked Questions
What is the penalty for not paying 941 taxes on time?
Depending on how late your payment is, the penalty ranges from 2% to 15% of the unpaid portion of your taxes.
How does the IRS determine deposit schedules?
Your deposit schedule is based on your overall tax liability during the lookback period. Those with lower tax liabilities may have a monthly deposit schedule, while those with a higher tax liability may have to follow a semiweekly deposit schedule.
Can I appeal a payroll tax penalty?
You can appeal a payroll tax penalty. You must do so within 60 days of the date on the notice. You have 75 days from that date if you received the notice while abroad.
What happens if I ignore payroll tax penalties?
The IRS may place a lien or impose a levy on your business assets. They may also assess a Trust Fund Recovery Penalty and hold any responsible parties personally liable for the past-due taxes and penalties. The IRS can also bring criminal charges against individuals who intentionally fail to pay their payroll taxes. Ignoring the problem can have serious consequences.
How can I avoid future payroll tax issues?
Many business owners find it helpful to automate as much as possible. This may involve hiring a payroll tax service or using payroll software that handles both your employees’ paychecks and your tax deposits.
If you’ve been hit with a failure to deposit penalty, you aren’t alone. Many business owners experience this at least once, and it’s often fairly easy to get back into compliance. Be proactive about this situation and get the professional help you need to streamline this part of business operations. Find out how Wiggam Law can help you with payroll tax penalties and IRS notices—just call us at (404) 233-9800 or reach out online.