Collecting, reporting, and remitting payroll taxes are some of your key responsibilities when you have employees. And if you forget or downright neglect your responsibility, your small business could receive a penalty for not paying payroll taxes.
Whatever your reason for missing your deposit deadline, not paying payroll taxes is a big deal to the IRS and other tax agencies.
Quick answer: Penalties for filing or paying payroll taxes late
- Failure-to-file a required return (e.g., Form 941) on time: 5% of the unpaid tax per month or part of a month, up to 25% total. If more than 60 days late, a minimum penalty applies (the IRS sets a dollar amount annually) or 100% of the tax due, whichever is less.
- Failure-to-deposit or pay withheld taxes on time: 2% (1 – 5 days late), 5% (6 – 15 days), 10% (16+ days), and 15% if not paid’ within 10 days after the first IRS notice.
- Interest accrues on unpaid tax and on penalties until paid.
- In severe cases, the IRS may assess the Trust Fund Recovery Penalty (TFRP) against responsible persons for 100% of unpaid trust fund taxes and can file liens or take collection action.
- What to do now: File the return even if you can’t pay, pay what you can, use EFTPS, consider a payment plan, and request penalty relief if eligible.
Recap of your payroll tax responsibilities
You must withhold taxes from your employees’ wages and contribute taxes. Take a look at this list of employment taxes you may need to handle:
- Federal, state, and local income taxes
- Social Security and Medicare taxes (also known as FICA tax)
- Federal and state unemployment taxes
- State-specific taxes (e.g., Oregon transit tax)
Withhold federal, state, and local income taxes, Social Security and Medicare taxes, and some state-specific taxes from employee wages. You must also contribute to Social Security and Medicare, unemployment, and some state-specific taxes.
Set aside withheld and contributed taxes for depositing. Deposit payroll taxes according to your depositing schedule.
The depositing schedule for federal income, Social Security, and Medicare taxes is either monthly or semiweekly (or annually in some cases). Your depositing schedule is based on a four-quarter IRS lookback period.
Deposit federal unemployment tax every quarter. Contact your state to find out when you need to deposit state unemployment tax and other state-specific taxes.
Don’t forget to report payroll taxes to the IRS and other tax agencies, too.
Reasons for employer not paying payroll taxes
Consider this scenario: You withhold payroll taxes from employee wages. You keep the money apart from your business’s other funds. But, you’re a busy business owner with a lot of tasks to handle. You completely forget your tax deposit due date and fail to pay payroll taxes.
Or, maybe this situation resonates with you: You set aside money for payroll taxes. But because your deposit isn’t due yet, you borrow your payroll tax funds during times of negative cash flow. When the payroll tax deposit due date arrives, you don’t have enough to pay, and there isn’t time to take out a payroll loan.
There are several other reasons business owners fail to pay their payroll taxes. For example, a natural disaster might prevent you from paying taxes on time. Or, your tax depositing schedule might change.
Penalty for not paying payroll taxes
About 70% of the annual revenue collected by the IRS comes from payroll taxes. Underreported and unpaid employment taxes account for approximately $72 billion of the U.S. tax gap. That’s why there are consequences when your business fails to deposit payroll taxes.
If you don’t pay payroll taxes for your business, you’ll receive a bill from the IRS and likely a penalty, too. According to the IRS, employers who don’t follow employment tax laws are subject to civil and criminal penalties.
So, what is the penalty for not paying payroll taxes on time? The penalty the IRS charges you depends on:
- How much you owe
- How late the payment is
Per the IRS, take a look at the penalty for not paying payroll taxes by the number of days late:
| # Days Late | Penalty |
|---|---|
| 1 – 5 days | 2% |
| 6 – 15 days | 5% |
| 16+ days | 10% |
| 10+ days after first IRS bill | 15% |
Let’s say you are responsible for depositing $2,500 in payroll taxes to the IRS. You are 16 days late. The IRS would charge you a penalty of $250, meaning you would owe $2,750 in total. Keep in mind that this does not include any state penalties you might be obligated to pay.
Penalties aren’t the only thing you have to worry about when you miss a payroll tax deposit deadline. You also face interest rates. According to the IRS, the interest rate can range from 3% – 6% of what you owe.
When you fail to pay your tax debt, the IRS could file a tax lien, which is a claim against your property.
If the IRS thinks you purposely are trying to evade taxes, you could owe a significant penalty, be subject to jail time, or both.
Keep in mind that there are additional penalties if you file your reports late, tooIn addition to late deposit penalties, the IRS also assesses a failure-to-file penalty on late employment tax returns (e.g., Form 941). This is generally 5% of the unpaid tax shown on the return for each month or part of a month the return is late, up to 25% total. If the return is more than 60 days late, a
minimum penalty applies (the IRS sets a dollar amount annually) or 100% of the tax due, whichever is less.
Interest accrues on both unpaid tax and penalties until paid.
In severe nonpayment cases, the IRS may assess the Trust Fund Recovery Penalty (TFRP) against any “responsible person” who willfully fails to collect, account for, or pay over trust fund taxes (the employee-withheld portion). The TFRP equals 100% of the unpaid trust fund amount and can apply to
owners, officers, and certain managers.
At a glance: Key federal penalty types
- Failure to deposit/pay (late payroll tax deposits): 2%–15% based on days late, plus interest.
- Failure to file (late returns like Form 941/940): 5% per month or part-month, up to 25% (minimum penalty may apply after 60 days).
- Trust Fund Recovery Penalty (TFRP): 100% of unpaid trust fund taxes against responsible
- persons.
- Possible liens, levies, and criminal penalties in cases of willful evasion.
Penalty exemptions
Sometimes, the IRS may waive a penalty … if you have a good enough reason. After receiving an IRS notice, you must explain why you believe you have a reasonable cause for not paying.
For example, the IRS may waive penalties if you file an employment tax return on time but miss the deposit deadline for a new depositing schedule.
You may also qualify for First Time Abate (FTA) relief if you have a clean compliance history (e.g., timely filings and payments for the prior three years and all current returns filed). Reasonable Cause relief can apply for events like natural disasters, serious illness, or other circumstances beyond your control. Provide documentation with your request and respond promptly to any IRS notice.
State and local penalties vary
States and localities set their own late filing, late payment, and interest rules for withholding and unemployment taxes. Rates, thresholds, and minimums can differ significantly. Check your state revenue and workforce agency guidance for specifics and due dates.
What to do if you missed a payroll tax deposit or filing
- File the return now, even if you can’t pay in full. Filing stops the larger failure-to-file penalty from accruing.
- Pay as much as you can today. This reduces interest and penalty amounts going forward.
- Use EFTPS or your approved payment channel.
- Set up a payment plan if needed. Consider an IRS installment agreement to keep interest and penalties from compounding unnecessarily.
- Review eligibility for penalty relief. Request First Time Abate or submit a Reasonable Cause explanation with supporting documents.
- Fix the root cause. Confirm your federal deposit schedule (monthly or semiweekly via the IRS lookback period), calendar deadlines, and automate payments to prevent repeat issues.
Tips and software solutions to avoid penalties for late payroll tax payments
If you’re like most business owners, you don’t want to deal with the penalty for not paying payroll taxes.
Here are some tips to help you stay on top of your payroll tax responsibilities.
Withhold, contribute, and set aside taxes
You must withhold taxes from employee wages each time you run payroll. And, you should be contributing each time, too.
Imagine that you wait until your tax deposit deadline to put aside your employer tax liability. Would you have enough money to cough up in one lump sum?
Create a system to help you remember that you need to withhold and contribute payroll taxes when you run payroll. You can use payroll software or set up reminders if you do payroll manually.
Don’t borrow from your payroll tax fund
It might be tempting to dip into your payroll tax fund if your business is short on cash. But, you must avoid borrowing from your fund. Otherwise, you may not have enough money to replace the borrowed funds.
Consider opening a separate payroll account for your collected and contributed taxes. That way, you can ensure you don’t use your payroll taxes to pay for other business expenses.
You can also create a cash reserve for your business. If you become short on cash, you can access your emergency funds rather than payroll tax funds.
Use full-service payroll software (like Patriot) to automate deposits and filings
Failing to pay payroll taxes on time can happen to any business owner. After all, you have a million things on your plate to keep track of. Instead of risking it, try full-service payroll.
Full-service payroll calculates and collects payroll taxes. Then, the provider remits the taxes to the correct tax agencies on your behalf.
FAQs: Late payroll taxes and penalties
Failure-to-file applies when a required return (e.g., Form 941) isn’t filed on time; fees are generally 5% per month up to 25%. Failure-to-deposit/pay applies when you don’t deposit withheld taxes by the
due date; 2% to 15% based on how late. Both can apply, but the IRS coordinates them so the combined charge per month doesn’t exceed certain limits.
Yes. File on time or as soon as possible to stop the larger failure-to-file penalty. Then pay what you can and consider a payment plan.
The IRS assigns monthly or semiweekly schedules based on your four-quarter lookback period. Review IRS guidance on lookback periods or consult your payroll provider.
The TFRP a 100% penalty on unpaid trust fund taxes (the employee-withheld portion), assessed against individuals responsible for collecting, accounting for, and paying them who willfully fail to do so.
Full-service payroll software automates tax calculations, withholdings, filings, and deposits on your behalf, helping you meet deadlines consistently and reducing the risk of manual errors. Some payroll providers may cover penalties and interest. For example, Patriot Software offers a tax filing reliability guaranteed, taking care of any penalties and interest if taxes aren’t filed and deposited accurately and on time based on account settings.
Yes. States and localities set their own rates, thresholds, and minimums for withholding and unemployment taxes. Check your state revenue and labor agency sites for details.
Want to avoid penalties for not paying payroll taxes? You need a reliable system that takes your responsibilities off your hands. Patriot’s Full Service payroll collects, files, and remits your payroll tax liability so you don’t have to. Explore our software with a self-guided demo now!
This article has been updated from its original publication date of September 19, 2016.
This is not intended as legal advice; for more information, please click here.
