If you run a business with full- or part-time employees, chances are you’re aware of payroll taxes. But what happens if you miss the deadline due to a cash crunch, clerical error or oversight? This guide explores penalties for unpaid or late payroll taxes, how they work and how to avoid incurring these pesky expenses.
What Are Payroll Taxes?
Payroll taxes are payable by companies to the Internal Revenue Service (IRS). The responsibility for withholding the funds falls on the employer, along with quarterly filings of payroll tax returns. If you miss the filing and/or payment deadline, you’ll be subject to penalties by the IRS.
Payroll Taxes You Are Required to Pay
FICA Taxes, Form 941, and Form 944
FICA (Federal Insurance Contributions Act) taxes, or Medicare and Social Security taxes, are withheld from employee wages. The IRS requires payment every two weeks if your company’s tax liability was over $50,000 in the prior four quarters. If it was below $50,000, you’re required to pay monthly.
For semi-weekly depositors, here’s when payments are due:
- If employees are paid on Wednesday, Thursday or Friday, payment is due by the following Wednesday.
- If employees are paid on a Saturday, Sunday, Monday or Tuesday, payment is due by the following Friday.
If you’re a monthly depositor, payments are due by the 15th day of the following month.
A quarterly tax return (IRS Form 941) must also be filed for each quarter by the final day of the following month. To illustrate, if the quarter ends in March, you’ll file by April 30th to avoid late filing penalties.
Quick note: If your annual liability for FICA and federal income tax is $1,000 or lower, you’ll file Form 944 (Employer’s Annual Federal Tax Return) once a year instead of Form 941 each quarter.
Federal and State Income Taxes
Federal and state income tax is also reported on Form 941 and paid in accordance with the payment schedule listed above. Be mindful that the filing and payment deadlines for state and local income taxes will depend on where you reside.
Federal Unemployment Taxes and Form 940
Companies that meet at least one of these criteria are responsible for federal unemployment tax:
- You have at least one employee for 20 or more weeks in a year.
- You pay $1,500 or more to employees in one or more quarters throughout the year.
The payment schedule varies by tax liability, but you’re required to file the Employer’s Annual Federal Unemployment (FUTA) Tax Return (IRS Form 940) at the end of the year.
State Unemployment Taxes
You’ll generally be liable for unemployment taxes in the states where you do business and employ workers. Again, the payment schedule and rates vary, but you’ll typically remit payment quarterly.
Employee Wage and Tax Reporting Forms
Companies must send IRS Form W-2 (Wage and Tax Statement) to employees and IRS Form 1099-NEC (Nonemployee Compensation) to contractors by January 31 each year for the prior tax year. While this doesn’t constitute a payroll tax payment or filing, failure to send out these forms on time could result in financial penalties.
What Are the Penalties for Unpaid or Late Payroll Taxes?
Failure to File Form 941 and similar forms
The penalty for failing to file Form 941 and other similar forms is as follows:
- A 5 percent penalty of the outstanding amount owed to the IRS
- .5 percent of the outstanding amount owed to the IRS (if you haven’t yet paid payroll taxes) that increases monthly until you pay the balance (up to 1 percent) or the IRS issues a Notice of Intent to Levy
- An additional 5 percent penalty each month the return remains outstanding (capped at five months)
Failure to Provide Information Returns to Employees such as Form W-2 and other payees on Form 1099-MISC
You’ll pay a penalty, but it’s based on your company’s size, the type of error made, and if payment was remitted.
Trust Fund Recovery Penalty (TFRP)
Delinquent payroll taxes trigger this penalty (assuming the owner “willfully” avoided remitting timely payment). The amount is equivalent to the amount of Medicare, Social Security or federal income tax your company owes, plus interest.
How Do Unpaid Payroll Tax Penalties Work?
If you fail to remit payroll taxes, here’s the penalty schedule:
- One to five days past due: 2 percent
- Six to 15 days past due: 5 percent
- Over 16 days past due (and within 10 days of the initial notice from the IRS): 10 percent penalty
- Over 10 days from the initial notice from the IRS or a notice demanding immediate payment: 15 percent
Business/Size of Company
Is your company classified as a small business or a large business?
Delay of Payment
Extensive delays mean more severe financial penalties.
Type of Infraction
The penalty you’ll pay for a mistake or oversight will likely be far lower than if you willfully evade payroll taxes or federal income taxes.
How To Avoid Paying Payroll Taxes Late
Don’t Ignore IRS Announcements
Refer to IRS.gov often and read its new releases to stay in the loop about tax laws, updates and other important information. You’ll also find deadlines listed on the website, along with tips to help you remain in compliance with federal tax guidelines.
Pay Attention to Announcements In Your State
It’s equally important to refer to the website of the taxing authority in your state or the states where your employees work. By visiting frequently, you’ll stay up to date about taxation developments and deadlines.
Budget For Payroll Taxes
If you’ve struggled to make timely payroll taxes due to financial constraints, create a budget for these expenses. That way, you won’t continue to get caught off-guard and deplete your reserves or pay late and incur hefty penalties. Consider allocating these funds as revenue is generated and placing them in a dedicated business checking account, preferably for payroll-related expenses, until payroll taxes are due.
Pay In Full When Taxes are Due
Be sure to make timely payments to the IRS. If you’ve had trouble doing so in the past, create an internal calendar with alerts, so you’ll know beforehand that payroll tax due dates are coming up soon.
Accurately Report Any Tax Liability
Confirm the numbers to ensure they’re not overstated or understated. You can automate payroll by hiring a payroll provider to assist you with the process and ensure you don’t miss important payment deadlines. Plus, you’ll have peace of mind knowing payroll taxes are computed properly and submitted in accordance with federal guidelines.
Submit Valid Checks for Tax Payments
Invalid checks could result in penalties from both the IRS and your financial institution.
File Your Tax Forms on Time
Don’t forget to meet the return filing deadlines.
Contact a Tax Relief Expert
If you’re stressed out about payroll taxes, it’s worthwhile to reach out to a tax relief expert for assistance. The can provide tailored solutions for companies and individuals with state tax problems looking to save money and time and avoid stress.
Frequently Asked Questions (FAQs)
Below are some frequently asked questions regarding payroll taxes and late payment penalties.
A payroll tax penalty is a penalty incurred by employers who fail to make timely deposits for employment taxes to the IRS. Your company could be liable for 2 percent to 10 percent of the amount owed if you fail to pay, depending on the type of penalty and how long it takes for you to remit payment.
The IRS lets you deduct an assortment of business-related expenses. However, payroll tax penalties aren’t one of them. But you can hire a professional payroll firm to handle payroll processing for you and avoid costly fines for not making timely payroll tax payments.
It depends on how long the balance for payroll taxes remains outstanding. Unpaid tax is subject to a 2 percent penalty if they are between one and five days past due. This amount increases to 5 percent if between six and 15 days have passed since the due date.
Once your balance is delinquent for more than 16 days and you’ve received a notice from the IRS, you’ll be assessed a 10 percent penalty. And if it’s been more than 10 days since you received a notice from the IRS and they send additional correspondence demanding payment, your penalty for unpaid payroll tax increases to 15 percent.
If you can prove you acted in good faith and have a viable reason for not making timely payroll tax payments, the IRS may be willing to remove or reduce the penalty. Refer to the letter you received from the IRS for additional instructions on how to move forward with requesting penalty relief. You could be eligible for relief through a Statutory Exception or First Time Penalty Abate and Administrative Waiver. Or you could be eligible on the grounds of a Reasonable Cause, like a natural disaster, serious illness, death, system issue, or civil disturbance or if you were unable to retrieve the records you needed to file and pay the taxes.
You’ll incur a 5 percent penalty that’s based on the amount owed to the IRS. The penalty will continue to grow by .5 percent each month the balance remains outstanding or if you receive a Notice of Intent to Levy from the IRS. There’s also a monthly penalty of 5 percent, which stops at five months.
The maximum monetary liability for unpaid payroll taxes is 15 percent of the amount owed. This penalty is assessed once the account balance has been outstanding for more than 10 days following receipt of a notice from the IRS about the delinquency or correspondence demanding immediate payment.
Companies are required to send out information returns, including W2 Forms and 1099s, to employees by the end of January each year. Failure to do so in a timely manner also results in penalties. However, the amount you pay will vary by the size of your company, the nature of the error and if you remit payment.
The IRS may be willing to negotiate unpaid payroll taxes in some instances. If a settlement offer is reached, your company will pay a percentage of the amount owed to the IRS. You can apply for a settlement by submitting Form 656 (Offer in Compromise) and the requested documentation. The outcome will depend on your company’s income, ability to pay and expenses. Be mindful that Offers in Compromise have a low acceptance rate, so it’s in your best interest to hire a tax relief expert to assist you with the submission process.
It depends on the reason for not paying. However, willful neglect sometimes results in both civil and criminal charges. And in severe cases, you could face up to five years in prison.
If you receive a notice from the IRS and disagree with the assessed penalty, you have a right to file a dispute with the IRS. You’ll need to reach out to the IRS directly by calling the toll-free number listed at the top of your notice and pleading with your case. You should have the notice handy when you call, along with your reason for disputing the penalty.
If you choose to file a grievance in writing, the letter should include the reason why you disagree with the assessed penalty and why it should be modified or removed. Sign the letter and mail it in. You should also include a copy of the IRS notice and any documents to substantiate your claims.
