Step-by-Step Guide to Catching Up on Past-due Payroll Taxes

What happens if payroll taxes are filed late? 

When you run payroll, you’re handling three main money groups:

1. Employee withholdings: Federal income, Social Security, Medicare, and state and local income taxes withheld from employee paychecks.
2. Employer payroll taxes: Your share of Social Security and Medicare taxes, federal and state unemployment taxes, and any local employer taxes.
3. Net pay: What your employees actually take home.

The IRS and your state treat the withheld taxes as trust fund taxes. You are “holding” that money for the government. When you don’t deposit or file on time, you’re essentially using money that doesn’t belong to you.

Here’s what can happen if payroll taxes are filed late or not paid:

• Failure-to-file penalties: A percentage of the unpaid tax for each month (or part of a month) your return is late, up to a cap.
• Failure-to-deposit penalties: Penalties for missing required deposit deadlines, based on how many days late your deposits are.
• Interest charges: Interest accrues on unpaid tax and some penalties until the balance is paid.
• Notices, liens, and levies: The IRS or state can file a tax lien, garnish accounts, or levy assets if balances remain unpaid.
• Personal liability in some cases: Under the federal Trust Fund Recovery Penalty (TFRP), “responsible persons” (like some owners or officers) can be held personally liable for certain unpaid payroll taxes.

This all sounds scary, but the path forward is clear: get current, get compliant, and stay that way. Let’s walk through how.

Step-by-step guide to catching up on past-due payroll taxes

Use the following starting steps to get current on past-due payroll taxes. 

Step 1: Commit to fixing it

You’re not the first business owner to fall behind. Cash flow crunches, staff turnover, and confusing rules can contribute to delays.

Your first order of business is to address the issue head-on, commit to getting (and staying!) current, and respond to notices instead of letting them pile up. 

Step 2: Get current 

Before you clean up the past, you need to make sure you’re not falling further behind.

1. Run payroll correctly going forward. Make sure you’re calculating withholdings and employer taxes correctly for every new payroll.
2. Start making required deposits now. Begin making current deposits on time (federal and state).
3. File current returns on time. Don’t let new returns go late while you’re fixing old ones.

Step 3: Gather your payroll records

Next, you need a clear picture of what actually happened.

Collect:

• Payroll registers or reports for each pay period.
• Employee W-2s and year-end summaries.
• Copies of any payroll tax returns you did file (Form 941, Form 940, state returns, etc.).
• Proof of any tax deposits you made (EFTPS confirmations, bank statements, etc.).
• IRS and state notices you’ve received.

If you used a basic payroll software that doesn’t file and deposit taxes for you, pull detailed reports for the periods in question. If you ran payroll manually or through spreadsheets, gather everything you have.

Step 4: Identify which returns are missing or wrong

Now, map your records to the required returns.

Common federal payroll forms include:

• Form 941: Quarterly federal tax return for income, Social Security, and Medicare taxes.
• Form 940: Annual federal unemployment (FUTA) tax return.
• Forms W-2 and W-3: Annual wage and tax statements for employees and SSA.

At the state level, you may have:

• State income tax withholding returns (quarterly, monthly, or annual).
• State unemployment (SUTA) returns.
• Local payroll tax returns in some cities or localities.

Create a simple checklist:

Period	Federal Return(s) Missing?	State Return(s) Missing?	Notes
Q1 2025	941, deposits	Withholding return
Q2 2025	941 filed, missing deposit
2025 Annual	940	SUTA annual return

Fill in each period where you’re behind or uncertain.

Step 5: Calculate what you owe 

Using your payroll records:

1. Calculate total wages and taxes for each quarter: Employee federal income tax withheld; employee and employer Social Security and Medicare; state and local withholdings; employer unemployment taxes.
2. Subtract deposits you already made. Match deposits to the correct period and tax type.
3. Determine the unpaid balance per period.

If your records are messy or incomplete, consider working with an experienced accountant and using payroll software going forward. 

Step 6: File all late returns, even if you can’t pay in full 

For each period with missing or incorrect returns:

1. Prepare the correct forms. For missing quarters, file original returns. For returns with errors, file amended returns (e.g., Form 941-X).
2. File as soon as possible. The failure-to-file penalty is often higher than the failure-to-pay penalty. 
3. Pay as much as you can. Even a partial payment reduces interest and penalties.
4. Keep copies of everything. Save filed forms, proof of mailing or e-filing, and payment confirmations.

Filing shows good faith. The IRS and state agencies generally prefer a business that files and works toward payment over one that disappears.

Step 7: Contact the IRS and your state about payment options 

If you can’t pay your taxes in business at once, you still have options. For federal payroll tax debts, you may be able to:

• Set up an installment agreement: A payment plan to pay off your balance over time.
• Request penalty relief in specific situations: If you have a clean history and a good reason (e.g., natural disaster, serious illness), you may qualify for an abatement of payroll tax penalties. The IRS decides case by case.

For state payroll tax debts, many states offer:

• Payment plans
• Penalty or interest relief programs
• Voluntary disclosure programs in some cases

When asking about payment options, be honest and prepared with your numbers. Explain what caused the problem and what you’ve changed to prevent it. Confirm what they expect from you next (forms, payments, deadlines).

Step 8: Respond promptly to any notices

As you file and pay, you may still receive balance due notices, requests for additional information, and notices about liens or levies.

Don’t ignore new notices. Instead:

• Read the notice carefully: Note the tax period, amount, and response deadline.
• Compare to your records: Make sure the IRS or state has processed your recent filings and payments.
• Respond by the deadline: Call, write, or use online portals (when available) to clarify or set up payment arrangements.

Step 9: Fix the root cause so it doesn’t happen again 

Catching up is only half the battle. You also want to make sure you never have to repeat this process.

Ask yourself:

• Did we misjudge cash flow and “borrow” from payroll taxes?
• Did we misunderstand deposit schedules or due dates?
• Were we relying on spreadsheets or sticky notes instead of a system?
• Did manual calculations lead to errors?

Then, put guardrails in place:

• Use payroll software that calculates, withholds, and tracks payroll taxes for you. 
• Automate reminders for due dates and deposits. Or, use payroll services that file and deposit on your behalf. 
• Separate funds in your bank account so tax money is never used for other expenses.
• Document your payroll process so it doesn’t fall apart when someone’s out sick or leaves.

Catching up on past-due payroll taxes [Checklist] 

Action	Status
Get current on today’s payroll and deposits	☐
Gather all payroll records and tax notices	☐
List all missing or incorrect returns	☐
Calculate unpaid taxes by period	☐
File all late and amended returns	☐
Pay what you can now	☐
Set up payment plans if needed	☐
Respond to IRS and state notices promptly	☐
Put systems in place to stay compliant	☐

How payroll software can help you stay on track  

The right payroll software can help you:

• Calculate payroll taxes automatically
• Track year-to-date wages and taxes
• Generate the payroll reports you need
• Reduce data entry mistakes
• Build a repeatable process

Use full-service payroll to calculate, file, and deposit taxes on your behalf. 

Frequently asked questions

This is not intended as legal advice; for more information, please click here.