IRS Failure To Deposit Penalty: What to Know

IRS failure to deposit penalty

As an employer, you are responsible for withholding taxes from your employee’s paychecks. If you don’t periodically remit these amounts to the United States Treasury, the IRS will assess a failure to deposit penalty (FTD). The FTD penalty increases the longer you delay making your payment. Therefore, you should remit these funds as soon as possible to reduce tax penalties. You may also be able to get the FTD penalty waived if you had a reasonable cause or you are requesting first-time penalty abatement (FTA).

What is the Failure to Deposit Penalty?

Employers are required to withhold amounts from their employee’s paychecks to cover federal income, Social Security, and Medicare taxes. As an employer, you must calculate these values correctly. Furthermore, you have to deposit them with the Treasury according to your businesses’ deposit schedule. If not, IRS will charge you an FTD penalty. To avoid the FTD penalty, you need to know your deposit schedule and make timely deposits using an electronic funds transfer. You should also avoid using unpaid tax deposits to finance your business because the penalties and interest will be more expensive than other forms of credit.

When Does the IRS Charge the Failure to Deposit Penalty?

The FTD penalty begins to accrue if your tax deposits are one day late. You’ll need to know your deposit schedule to make payments on time. Depending on the amount of taxes you are depositing, you will have a quarterly, monthly, or semiweekly deposit schedule. Paying on time is one part of your tax obligations. The other parts include paying the full amount and using the correct payment method. If you don’t use the right payment method or pay the proper amount, you may still receive the FTD penalty.

How Much Is the IRS Failure to Deposit Penalty or Penalty for Late Payment of Payroll Taxes?

The FTD penalty structure has four tiers, with the penalty amount increasing over time. The amount of the FTD penalty is as follows:

  • 2% of the unpaid deposit for payments that are 1 to 5 days late
  • 5% for tax payments that are 6-15 days late
  • 10% for deposits that are more than 15 days late or made within ten days of receiving the first IRS notice requesting a tax payment
  • 15% for deposits not received within ten days after receiving the first IRS notice demanding payment

Also, deposits not made by electronic funds transfer are subject to the 10% penalty rate. If you deposit less than the amount of taxes you owe, the FTD penalty will apply to the part of the payment you still owe. You should pay as much of the required amount as you can and make late payments as soon as possible to reduce penalties and interest you owe.

If the IRS determines that you willfully failed to remit payroll taxes, they may also assess the more severe Trust Fund Recovery Penalty (TFRP). You can be personally liable for paying the TFRP if you are a person responsible for collecting and submitting payroll taxes who willfully fails to do so. This penalty is equal to 100% of the unpaid trust fund taxes.

What is the Interest Associated With Failure to Deposit Payroll Taxes?

The IRS publishes interest rate applicable to late payments on a quarterly basis. Recently, the interest rate on late-payments has been around 3 or 4 percent. Interest will continue to accrue on your late tax payments until you pay the amount due in full. The IRS can waive or abate the FTD penalty due to reasonable cause. However, interest on the delinquent tax payment will continue to accrue even if you eliminate penalties.

Can the Failure to Deposit Penalty Be Waived or Reduced?

Yes. First, taxpayers can request the IRS’s first-time penalty abatement waiver for the failure to deposit penalty. However, to qualify, the business must not have incurred other significant penalties within the past three years. Moreover, your business must be in payment and filing compliance.

Second, the IRS can waive the FTD penalty if you had a reasonable cause. If you failed to make your first required tax deposit or the first deposit after a change in the frequency of your tax deposits, the IRS might waive your penalty. For example, if you forget to make the first payment after switching from monthly to semiweekly tax deposits, you may request a penalty waiver. You will need to make sure you file your employment tax returns on time to be eligible for this penalty reduction.

You can also determine which payment periods you want your tax payments to address. By default, the IRS will apply payments to your most recent tax liability. However, you can send a request to the IRS specifying how you want your tax payments applied. You may choose to pay off the oldest delinquent balances first, which could reduce the number of penalties you owe.

If your business has unpaid payroll taxes, the IRS can use powerful collection methods to get the money you owe. For example, the IRS can put a lien on your business. However, you may be able to have your FTD penalties waived or work out an arrangement to pay back your delinquent taxes over time. Consult with a tax professional to determine your best option for handling your unpaid payroll taxes.