Payroll Penalties

Employers who do not deposit their withholding and payroll taxes on schedule, or timely file Form 941, are subject to substantial IRS payroll penalties for late payment, underpayment and late filing penalties. Payroll penalties do not apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect.

Late Paying or Not Properly Deposited Penalties

2% - Deposits made 1 to 5 days late.
5% - Deposits made 6 to 15 days late.
10% - Deposits made 16 or more days late. Also applies to amounts paid within 10 days of the date of the first notice the IRS sent asking for the tax due.
10% - Deposits made at an unauthorized financial institution, paid directly to the IRS, or paid with your tax return. But see Depositing without an EIN on page 22 and Payment with return on page 18 of Publication 15 for exceptions.
10% - Amounts subject to electronic deposit requirements but not deposited using EFTPS Electronic Federal Tax Payment System
15% - Amounts still unpaid more than 10 days after the date of the first notice that the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.

Trust Fund Recovery Penalty-Watch Out for This One!

If income, social security, and Medicare taxes that must be withheld are not withheld or are not deposited or paid to the United States Treasury, the trust fund recovery penalty may apply. The penalty is 100% of the unpaid trust fund tax. This particularly painful payroll penalty may apply to a responsible individual if unpaid trust fund taxes cannot be immediately collected from the employer or business.

A responsible person is anyone who is determined by the IRS to be responsible for collecting, accounting for, and paying over these payroll taxes, and who acted willfully in not doing so.

A responsible person can be an officer or employee of a corporation, a partner or employee of a partnership, an accountant a volunteer director/trustee, or an employee of a sole proprietorship. A responsible person also may include one who signs checks for the business or otherwise has authority to cause the spending of business funds.

Willfully means voluntarily, consciously, and intentionally. A responsible person acts willfully if the person knows that the required actions are not taking place.

Separate accounting when deposits are not made or withheld taxes are not paid

Separate accounting may be required if you do not pay over withheld employee social security, Medicare, or income taxes; deposit required taxes; make required payments; or file tax returns. In this case, you would receive written notice from the IRS requiring you to deposit taxes into a special trust account for the U.S. Government. You would also have to file monthly tax returns on Form 941-M, Employer's Monthly Federal Tax Return.

Averaged failure to deposit penalty

The IRS may assess an "averaged failure" to deposit (FTD) penalty of 2% to 10% if you are a monthly schedule depositor and did not properly complete line 15 of Form 941 when your tax liability (line 10) shown on Form 941 was $2,500 or more. IRS may also assess this penalty of 2% to 10% if you are a semiweekly schedule depositor and your tax liability (line 10) shown on Form 941 was $2,500 or more and you did any of the following:

Completed line 15 of Form 941 instead of Schedule B (Form 941
Failed to attach a properly completed Schedule B (Form 941)
Completed Schedule B (Form 941) incorrectly, for example, by entering tax deposits instead of tax liabilities in the numbered spaces.

941 Failure to File Penalty

There is a penalty of 5% of the unpaid tax due for each month that the 941 return is not filed. The maximum penalty is 25% of the tax due. In addition to any penalties, interest accrues from the due date of the tax on any unpaid balance

Please refer to the most current version of IRS Publication 15 for additional information.