What Are Unpaid Payroll Tax Penalties?

Definition and Examples of Unpaid Payroll Tax Penalties

Definition

Unpaid payroll tax penalties are fees the Internal Revenue Service (IRS) assesses on an employer's account when they fail to collect, report, and remit payroll taxes.

Storekeeper in a rural shop at a rustic desk doing bookkeeping
Photo:

 

Trevor Williams / DigitalVision / Getty Images

 

Key Takeaways

  • All employers are required to withhold income tax, Social Security tax, and Medicare tax from employees' pay and report and submit these amounts to the IRS.
  • Employers must also match the Social Security and Medicare taxes that were withheld and pay these sums to the IRS.
  • The IRS assesses monetary penalties ranging from 2% to 100% of the unpaid tax when employers willfully disregard these requirements, depending on the type of tax.
  • Penalties can be charged even if you’re simply late with submitting payments. 

What Are Unpaid Payroll Tax Penalties?

The IRS lists numerous requirements and penalties for failure to meet payroll duties in IRS Publication 15, but some are more common than others. The most frequent missteps are for Form 941 taxes—withholding and FICA taxes—but some apply to other similar forms.

  • 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.

Note

Deposits are applied to the most recent liability, so be careful not to make them late.

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 tax
  • Failure 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."

Note

In some cases, a reckless disregard of obvious facts is enough to show willfulness.

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.

Frequently Asked Questions (FAQs)

What is the penalty for not paying FICA taxes?

The penalty for not paying FICA taxes and other employment taxes is based on how late you were. They start at 2% for taxes paid one to five days late, and up to 15% for taxes paid more than 10 days after you receive your IRS notice about your unpaid tax bill.

What happens if you pay payroll taxes late?

If you submit your payroll taxes late, you'll have to pay a penalty that's based on how late you paid your taxes. Penalties range from 2% to 15%.

Was this page helpful?
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Information About Your Notice, Penalty and Interest," Page 1.

  2. IRS. "Increase in Information Return Penalties."

  3. IRS. "Trust Fund Recovery Penalty."

  4. IRS. "Publication 15 (2021), (Circular E), Employer's Tax Guide," Click on "Order in which deposits are applied" in left sidebar.

  5. IRS. "Publication 15 (2022), (Circular E), Employer's Tax Guide," Click on "Treating employees as nonemployees" in left sidebar.

  6. IRS. "Trust Fund Taxes."

  7. IRS. "Employment Taxes and the Trust Fund Recovery Penalty (TFRP)."

  8. IRS. "Publication 15 (2022), (Circular E), Employer's Tax Guide." Click "Trust fund recovery penalty" in left sidebar.

  9. IRS. "Understanding Employment Taxes."

  10. IRS. "Topic No. 759 Form 940—Employer's Annual Federal Unemployment (FUTA) Tax Return—Filing and Deposit Requirements."

  11. AccountingTools. "Where Do Payroll Taxes Appear in the Financial Statements?"

Related Articles