Part of the role of being an employer is withholding, contributing to, and remitting employment taxes. But, what happens if you don’t make a payment on time or pay an incorrect amount? Cue the Failure to Deposit Penalty.
Employment taxes overview
Before we can get into the IRS Failure to Deposit Penalty, let’s briefly recap what employment taxes include.
According to the IRS, employment taxes include:
- Federal income tax (FIT)
- Social Security and Medicare taxes (aka FICA tax)
- Federal unemployment tax (FUTA tax)
- Additional Medicare tax, if applicable
Self-employed individuals are responsible for a special type of employment tax called self-employment tax.
There are other taxes that employers and employees may need to contribute. However, these are considered payroll taxes and not employment taxes.
Employers must remit employment taxes to the IRS on a monthly or semiweekly basis, depending on their lookback period.
What is the Failure to Deposit Penalty?
Employers have to pay the Failure to Deposit (FTD) Penalty if they:
- Don’t pay their employment tax liability on time
- Pay the incorrect amount in employment taxes
- Do not pay in the right way
If you are required to pay the penalty for one of the above reasons, the IRS will send you a notice or letter.
To avoid the FTD Penalty, you need to know your federal deposit schedule, correctly calculate employment taxes, and make timely deposits using EFTPS.
To ensure you aren’t subject to the failure to make a proper tax deposit penalty, review information about schedules, due dates, employment tax amounts, and forms to file.
How much is the FTD Penalty?
The IRS calculates the penalty based on the number of calendar days the deposit is late (starting from its due date).
Here’s a breakdown of the penalty amounts:
|Number of Days Late||Penalty Amount|
|1-5 calendar days||2%|
|6-15 calendar days||5%|
|15+ calendar days||10%|
|More than 10 calendar days after the date of your first notice or letter or the day you get a notice or letter for immediate payment||15%|
Deposits not made by electronic funds transfer are also subject to the 10% penalty rate.
Penalty amounts don’t add up. For example, if your deposit is seven calendar days late, the IRS won’t add the 5% and 2% penalties together. Instead, your total penalty is 5%.
Is there interest on payroll deposit penalties?
The IRS does charge interest on penalties. The date they begin to charge interest varies depending on the type of penalty. Interest increases the amount you owe until you pay off your entire balance.
To stop interest from adding up, you can pay in full or make payments.
Disputing a FTD Penalty
Employers can dispute the penalty by:
- Calling the phone number on the notice or letter
- Writing a letter to the IRS stating why they should reconsider the penalty
- With this method, you must also include any supporting documents with your letter
To dispute a Failure to Deposit Penalty, have information handy, like the notice or letter from the IRS and penalty information.
Avoiding the federal tax deposit penalty
At some point or another, you may make an employment tax mistake and have to deal with the FTD Penalty. If you want to steer clear of the penalty as much as possible, make sure you:
- Review due dates
- Double-check your tax deposit schedule
- Look over your employment tax calculations and amounts (payroll software can help with this!)
- Pay using the correct method (e.g., EFTPS)
- Set reminders for yourself
To help avoid any penalties, you can also have someone else double-check employment tax information to ensure everything is accurate.
This is not intended as legal advice; for more information, please click here.