What are the penalties for paying payroll taxes late?

The Internal Revenue Service (IRS) is very strict about payroll tax deposits. All business should strive to submit payroll tax deposits on time. Payroll tax penalities and fines apply if businesses fail to make timely payroll tax deposits. Business owners or other employees who are in charge of collection, accounting, and payment of payroll taxes may also be penalized by the IRS if they are found to have intentionally failed to deposit payroll taxes. Payroll tax penalties will apply not only if you fail to make payroll tax deposits on time, but also if you fail to make deposits for less than the required amount. In some cases, the IRS will waive payroll tax penalities if the failure to make payroll tax deposits was unintentional and there was a reasonable cause for the business to miss making the deposit.

Payroll Tax Penalties

The amount of the penalty for failure to deposit payroll taxes on time or in full varies depending on how late the payment is and the amount that is past due. For deposits made 1-5 days late, the penalty is 2% of the past due amount. For deposits made 6-15 days late, the payroll tax penalty is 5% of the past due amount. For deposits made 16 or more days late, the penalty amount is 10% of the past due amount. Payroll tax penalties increase to 15% of the past due amount if the IRS has sent a notice requesting the tax due and it remains unpaid for more than 10 days after that notice was received by the business. The amount of the late deposit penalty is calculated using calendar days starting with the due date of the payroll tax deposit.

Designate Application of Late Payroll Taxes to Reduce Penalties  

If you missed payroll tax deposits and are making catch-up contributions, you have the right to ask the IRS to designate how your payments should be applied in order to reduce the past due payroll tax penalties. You must make this request within 90 days after receiving a past due notice. Generally, deposits are applied to the current amount due first and then towards the past due amount. Assume Company X is required to make a payroll tax deposit of $1,000 on May 15 and  $1500 on June 15, but misses its May 15 deposit, but then makes a $2000 deposit on June 15. The $2,000 deposit will be applied as follows: $1500 towards the amount due on June 15 ($2000-$1500) with $500 leftover that will be applied towards the May 15 missed deposit ($1000-$500), which leaves a total past due amount of $500. The failure to deposit penalty will be calculated based on the $500 that is past due.

Certain businesses are required  to make payroll tax deposits through the Electronic Federal Tax Payment System (EFTPS) and if they fail to use EFTPS, they will also incur penalties. Beginning January 1, 2011, all businesses will be required to make deposits electronically through EFTPS.

Penalties for Late Payroll Tax Payments: Case Studies

Case Study 1: Smith Manufacturing With Workers’ Compensation Insurance

Smith Manufacturing is a small business that provides workers’ compensation insurance for its employees. Due to financial difficulties, the business is unable to make timely payroll tax payments. As a result, they incur penalties for late payments.

Fortunately, Smith Manufacturing had the foresight to invest in workers’ compensation insurance, which includes coverage for penalties and fines related to payroll tax payments. The insurance policy helps mitigate the financial burden of the penalties, allowing the business to focus on resolving its financial issues without additional strain.

Case Study 2: Johnson Plumbing With General Liability Insurance

Johnson Plumbing is a plumbing company owned by John Johnson. He accidentally misses a payroll tax payment deadline, resulting in penalties imposed by the IRS. Since Johnson Plumbing has general liability insurance, John contacts his insurance provider, hoping for coverage for the penalties.

However, he learns that general liability insurance typically does not cover payroll tax penalties. John realizes the importance of keeping track of his tax obligations and decides to consult with a tax professional to avoid future penalties.

Case Study 3: GreenTech Corporation With Business Interruption Insurance

GreenTech Corporation experiences a major business disruption that impacts its cash flow and ability to meet financial obligations, including payroll tax payments. As a result, the corporation fails to make payroll tax payments on time and incurs penalties from the IRS. Fortunately, GreenTech Corporation had business interruption insurance, which covers financial losses due to unexpected events.

The insurance policy includes coverage for penalties resulting from late payroll tax payments. With the help of the insurance coverage, GreenTech Corporation is able to navigate the financial challenges and get back on track with its tax obligations.