How the IRS calculates late deposit penalties

The IRS assesses penalties on failure‑to‑deposit employment taxes based on how late the deposit is. Typical rates are:

  • 1–5 days late: 2%
  • 6–15 days late: 5%
  • 16+ days late: 10%
  • After 10 days from an IRS notice and demand: 15%

(There can be harsher penalties for intentional failure to collect, account for, and pay over taxes.) Source: IRS, “Penalties for Late Payroll Deposits” (irs.gov/payroll-taxes/penalties-for-late-payroll-deposits).

Primary remedies

  1. First‑Time Penalty Abatement (FTA)
  • The IRS may grant FTA to taxpayers without a significant penalty history; it often applies to one penalty for a clean three‑year history. FTA is a fast, administrative relief option. See IRS guidance on penalty relief (irs.gov/payroll-taxes/penalty-relief).
  1. Reasonable‑Cause Penalty Abatement
  • If you can show the late deposit resulted from circumstances beyond your control (serious illness, natural disaster, death in the family, banking or software failures, or other documented events), the IRS may abate the penalty. The claim must include clear documentation and a concise, dated explanation of events.
  • See our step‑by‑step evidence checklist in “How to Get a Penalty Abatement for Reasonable Cause: Evidence Checklist” for examples of helpful documents.
  1. Disaster‑ or Hardship‑Related Relief
  • The IRS routinely provides relief for federally declared disasters and sometimes for widespread operational disruptions. If your lateness coincides with a declared disaster, include FEMA or other official notices with your request.
  1. Administrative Appeal or Collection Alternatives
  • If relief is denied, you can appeal the decision through the IRS Office of Appeals or request other collection alternatives (installment agreement, penalty abatement reconsideration during appeal).

How to request relief (practical steps)

  1. Respond promptly to any IRS notice: follow the notice instructions and meet the response deadline.
  2. Compile documentation: deposit records (EFTPS), bank statements, payroll system logs, emails showing attempts to pay, vendor statements, disaster declarations, medical records if applicable.
  3. Choose your method:
  • Submit a written reasonable‑cause letter (signed) with attachments.
  • File Form 843, Claim for Refund and Request for Abatement, when refund/abatement is appropriate.
  • If a notice was issued, use the notice response channel or call the phone number on the notice.
  1. If eligible, request First‑Time Penalty Abatement and include evidence that you meet the criteria.

For templates and a tested letter format, see our guide: “Preparing a Reasonable Cause Letter for Penalty Abatement: Sample Template”.

Documentation checklist (what the IRS looks for)

  • Timeline of events with dates and times
  • Proof of attempted deposit (EFTPS confirmation, bank ACH logs)
  • Evidence of cause (disaster declaration, hospital records, server outage logs)
  • Records of internal controls in place (payroll policy, approval workflows)
  • Prior compliance history (to support FTA eligibility)

Timeline and expectations

  • Administrative responses can take 60–180 days depending on IRS backlog and whether the case goes to appeal.
  • Keep paying current payroll deposits; relief typically affects penalties, not the underlying tax or interest.

Prevention strategies (reduce future risk)

  • Use EFTPS or an automated payroll service and enable dual controls (separate people for submission and approval).
  • Reconcile payroll liability accounts weekly and run deposit reminders tied to pay cycles.
  • Maintain a small contingency cash buffer for payroll taxes.

Real‑world example (typical outcome)

A small employer missed a semiweekly deposit because a bank ACH failed and the payroll manager was hospitalized. The employer compiled bank rejection notices, a hospital discharge summary, and proof of a clean prior history, and successfully obtained first‑time abatement for the penalty and interest continued to accrue on the tax balance.

Links and further reading

Professional tips

  • Document contemporaneously. Notes typed weeks later carry less weight than original logs or emails.
  • If the penalty is large, engage a CPA or tax attorney early — they can streamline evidence and liaise with the IRS.

Professional disclaimer: This article is educational and does not constitute tax, legal, or accounting advice. For help tailored to your situation, consult a qualified tax professional.

Authority: IRS guidance on payroll deposit penalties and penalty relief (irs.gov).