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Failure to file Form 941 and similar forms will result in a 2% penalty if you’re one to five days late, a 5% penalty if you’re six to 15 days late, or 10% for payments made 16 days late or more, or within 10 days of first notice from the IRS. The maximum penalty is 15%, which is for amounts you don’t pay more than 10 days after you get your first IRS notice about the tax due.Failure to provide information returns to employees, such as Forms W-2, and other payees on Form 1099-MISC can also mean IRS penalties.A trust fund recovery penalty (TFRP) is charged for failure to pay payroll taxes when they’re due.
How Do Unpaid Payroll Tax Penalties Work?
Let’s say you’re required to make a deposit of $1,500 every month. You don’t make your March 15 deposit, but you make a deposit of $2,000 on April 15 to catch up. Of that payment, $1,500 is applied to April 15, and $500 to March 15, so you could be assessed a penalty for the $1,000 that wasn’t deposited for March 15. You can also be penalized for unpaid payroll taxes if you misclassify employees as independent contractors. You don’t have to withhold income taxes or FICA taxes from payments made to independent contractors, but you could face penalties if the IRS finds that they were misclassified and should have been paid as employees because they haven’t met the qualifying rules for independent contractors.
Payroll Taxes Are Trust Fund Taxes
Trust fund taxes are those collected from someone, typically a customer or an employee, then held by a business “in trust” until they’re turned over to the appropriate taxing entity. Sales tax and payroll taxes are the most common types of trust fund taxes. The IRS can impose the trust fund recovery penalty for these unpaid taxes when a business doesn’t make payments on time. The TFRP can be imposed by the IRS for willful:
Failure to collect taxFailure to account for and pay tax
The failure must meet these “willful” tests and be committed by a party who was responsible for the failure. The IRS defines willful as “voluntarily, consciously, and intentionally.”
Types of Payroll Taxes
The IRS calls payroll taxes “employment taxes.” They’re those that your business is required to withhold and pay when you have employees. These taxes include:
Federal income taxes: Must be withheld from employee pay and paid to the IRS as required by law. Social Security and Medicare taxes: Commonly referred to as “FICA taxes,” these taxes must be withheld from employee pay and matched by employers. Federal unemployment taxes: Must be paid by the employer, based on the gross pay of all employees. State unemployment taxes: Must be collected, reported, and paid according to state laws.
Let’s say a business has several employees, and the company withholds $5,000 in federal income tax and $2,000 in FICA tax from all the employee paychecks for one payday.
The $5,000 in federal income tax must be paid to the IRS.The $2,000 in FICA tax must be paid to the IRS for the Social Security Administration, along with an additional $2,000 the company owes as its share of FICA taxes.
The company should identify its withheld employment taxes in its accounting and make payments to the IRS when they are due.
