Why this matters
Employers hold certain payroll taxes in trust for the government. When those deposits are late or missed, the IRS charges a failure-to-deposit penalty under 26 U.S.C. § 6656 to encourage timely payment and protect tax receipts (IRS: Penalty for Failure to Deposit Employment Taxes, 2025).
How penalties are calculated (current rules)
- 2% of the unpaid deposit if 1–5 days late; 5% if 6–15 days late; 10% if more than 15 days late. A higher 15% rate can apply after a formal notice and demand or in certain willful-failure situations. (See IRS: Penalty for Failure to Deposit Employment Taxes — https://www.irs.gov/penalties/penalty-for-failure-to-deposit-employment-taxes)
Common triggers I see in practice
- Using the wrong deposit schedule: employers who switch between monthly and semiweekly thresholds but don’t update processes. See our guide to payroll deposit schedules for details on who follows monthly vs. semiweekly rules: Payroll deposit schedules: which employers follow monthly vs semiweekly rules (FinHelp).
- Thinking payroll software handles everything. Software helps, but reconciliation and oversight are still required.
- Cash-flow shortfalls that delay transfers.
- Misclassifying workers or understating wages, which leads to under-depositing trust taxes.
Immediate steps if you receive a penalty notice
- Confirm the shortfall and amount due — check your payroll reports and bank records.
- Deposit any unpaid taxes immediately via EFTPS or your financial institution. EFTPS accepts deposits 24/7 and is the fastest way to stop additional penalties (EFTPS: https://www.eftps.gov/eftps/).
- File the required return (e.g., Form 941) on time even if you can’t pay the full deposit; filing reduces other penalties. If you filed with the wrong amounts, use Form 941-X to correct past quarters (IRS: About Form 941-X — https://www.irs.gov/forms-pubs/about-form-941-x).
- Respond to any IRS notice—don’t ignore it. The notice will explain the penalty, and responding promptly preserves options.
How to request penalty relief
- First-time penalty abatement (FTA): small-business employers may qualify for one-time relief if they have a clean compliance history for the prior three years. See the IRS penalty relief guidance for eligibility (IRS Penalty Relief: https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief).
- Reasonable cause: document why the deposit was late (serious illness, natural disaster, bank error) and provide supporting evidence when requesting abatement.
- Reasonable-cause requests and first-time abatement are different processes—work with a tax pro if the facts are borderline. In my practice I prepare a short, factual abatement packet (timeline, bank statements, payroll records) which improves approval odds.
When penalties become trust fund or personal-liability issues
The “trust fund” portion of payroll taxes (employee withholding for federal income tax and the employee share of FICA) is treated differently. Responsible persons can be assessed individually through the Trust Fund Recovery Penalty (TFRP). Preventing deposit penalties also helps avoid TFRP exposure—see our article on preventing payroll tax trust fund penalties for best practices (FinHelp).
Practical prevention tips
- Automate: use EFTPS for deposits and choose reputable payroll software that integrates deposits and reconciliation.
- Reconcile weekly or monthly: compare payroll reports to bank withdrawals and the amounts on Forms 941/941-X.
- Set internal controls: require dual review for deposits and a backup approver if the primary person is unavailable. See our internal-controls checklist for payroll taxes for concrete steps (FinHelp).
- Build a small buffer: keep a short-term cash reserve to cover payroll tax deposits during lean weeks.
If you can’t pay in full
- Pay what you can to reduce penalty and interest accumulation.
- Apply for an IRS installment agreement for the balance; the IRS considers payment plans when collections officers evaluate your case. If the issue includes unfiled returns or repeated nonpayment, contact a tax professional.
When to get professional help
- Multiple quarters missed, large balances, or any indication the IRS will assess a TFRP — seek a CPA or tax attorney experienced in payroll tax controversies. In my 15+ years advising small employers, early engagement of a specialist often preserves abatement eligibility and limits enforcement escalation.
Authoritative sources
- IRS — Penalty for Failure to Deposit Employment Taxes: https://www.irs.gov/penalties/penalty-for-failure-to-deposit-employment-taxes
- IRS Publication 15 (Employer’s Tax Guide): https://www.irs.gov/pub/irs-pdf/p15.pdf
- IRS — Form 941-X (Adjustments): https://www.irs.gov/forms-pubs/about-form-941-x
- IRS — Penalty Relief information: https://www.irs.gov/businesses/small-businesses-self-employed/penalty-relief
Related resources on FinHelp
- Mitigating penalties for late payroll deposits: Employer remedies — https://finhelp.io/glossary/mitigating-penalties-for-late-payroll-deposits-employer-remedies/
- Payroll deposit schedules: which employers follow monthly vs semiweekly rules — https://finhelp.io/glossary/payroll-deposit-schedules-which-employers-follow-monthly-vs-semiweekly-rules/
- Preventing payroll tax trust fund penalties: Best practices for employers — https://finhelp.io/glossary/preventing-payroll-tax-trust-fund-penalties-best-practices-for-employers/
Professional disclaimer
This article is educational and does not replace personalized tax advice. Rules change and facts matter—consult a qualified tax advisor or CPA about your specific situation.
