Why it matters

Payroll deposit mistakes can trigger tiered failure‑to‑deposit penalties, interest, and—even more serious—the Trust Fund Recovery Penalty (TFRP) for unpaid employee‑withheld taxes. Acting quickly limits exposure and demonstrates good faith to the IRS (IRS Publication 15; Trust Fund Recovery Penalty page).

Step‑by‑step actions employers should take

  1. Reconcile and document the error
  • Compare payroll registers, Form 941 (quarterly returns), W‑2s, and bank/EFTPS records to confirm the shortfall or overpayment. Keep clear notes on what went wrong and when it was discovered.
  1. Make the missing deposit immediately
  • If you under‑deposited or missed a deposit, pay the balance as soon as possible through the Electronic Federal Tax Payment System (EFTPS). Prompt deposits reduce failure‑to‑deposit penalties and limit interest accrual (EFTPS; IRS — Failure to Deposit Penalty).
  1. Correct previously filed returns when required
  • Use Form 941‑X (Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund) to correct wages, tax withholdings, or tax liabilities for a prior quarter. Do not wait until tax season to fix past quarters—the IRS expects timely corrections (IRS: About Form 941‑X).
  1. Calculate and pay penalties and interest (or request relief)
  • Failure‑to‑deposit penalties are tiered: typically 2% for 1–5 days late, 5% for 6–15 days late, 10% after 15 days, and can reach 15% after an IRS Notice and Demand. Interest accrues on unpaid tax from the due date (IRS — Failure to Deposit Penalty).
  • If you have reasonable cause or meet the First‑Time Abatement criteria, you can request penalty relief (IRS: Penalty Relief).
  1. Watch trust‑fund amounts closely
  • Taxes withheld from employees (federal income tax and the employee portion of Social Security and Medicare) are trust funds. Failure to remit these can expose “responsible persons” to a 100% Trust Fund Recovery Penalty (IRC §6672) (IRS: Trust Fund Recovery Penalty).
  1. If you can’t pay in full, communicate with the IRS
  • Consider an installment agreement, an Offer in Compromise (rare for trust fund balances), or short‑term payment arrangements. Prompt communication can reduce collection enforcement actions (IRS collection options).
  1. Fix root causes and document controls
  • Implement recurring reconciliation, access controls, payroll software checks, dual approvals for deposits, and staff training. See also our guide on building payroll audit checklists and internal controls ([How to Build an Internal Audit Checklist for Payroll Taxes] and [Internal Controls to Prevent Payroll Tax Mistakes at Small Employers]).

Common scenarios and the right correction method

  • Same‑quarter deposit shortfall: Make the missing deposit ASAP via EFTPS and document it; you may adjust the next deposit only if authorized—don’t rely on informal offsets.
  • Prior‑quarter reporting error (wages, withheld taxes): File Form 941‑X for that quarter and pay any tax, penalties, and interest shown.
  • Overpayment: Claim the overpayment on Form 941‑X or apply it to a future deposit per IRS guidance.

Real‑world example

A small employer underreported federal income tax withholding for a single quarter. After reconciling, they deposited the missing balance via EFTPS, filed Form 941‑X to correct the quarter, paid assessed interest, and applied for First‑Time Abatement for the penalty—successfully reducing the penalty amount because the employer had a clean history and prompt remediation.

Key penalties at a glance

  • Failure‑to‑deposit: 2% (1–5 days), 5% (6–15 days), 10% (>15 days), 15% after IRS notice (see IRS guidance).
  • Trust Fund Recovery Penalty (TFRP): up to 100% of unpaid trust fund taxes for responsible persons (IRS — Trust Fund Recovery Penalty).
  • Interest: charged on unpaid tax from the original due date until paid.

Professional tips

  • Automate deposits through EFTPS and set multiple calendar reminders tied to your deposit schedule (monthly vs. semiweekly rules) (see Payroll Deposit Schedules).
  • Reconcile payroll accounts weekly during high‑risk periods (staff turnover, software migrations).
  • Keep clear written procedures and cross‑training so a second person can confirm deposits and filings.

When to involve a tax professional or the IRS

  • If the amount is large, the TFRP may be at risk, or you’re unsure who is a “responsible person,” get experienced payroll tax counsel.
  • If you can’t pay the full balance, contact the IRS early to explore payment arrangements.

Related FinHelp guides

Authoritative sources

Professional disclaimer

This article is educational and not individualized tax advice. For specific payroll tax correction strategies and representation, consult a qualified tax professional or payroll specialist.