Comprehensive Guide to IRS Payroll Tax Penalties

December 5, 2023 | payroll tax

Unpaid Payroll Taxes: Penalties, Personal Liability, and More

An overwhelming 70% of all revenue collected by the IRS comes directly from employee wages. That said, the tax agency puts a lot of weight on payroll taxes and ensuring that businesses pay the right amount in a timely manner. When you fall behind on payroll taxes, you can expect to face penalties, fees, and possibly other consequences if you fail to address the problem. Even worse, your minor delinquent payroll debt could grow into a massive problem as penalties, interest, and ongoing payroll taxes collect on your account.  The good news is that there are plenty of ways to resolve your debt and get back into good standing with the IRS. If you’ve fallen behind on payroll taxes and you’re concerned about the legal and financial consequences, then it might be best to discuss your situation with a tax attorney. Learn more about delinquent payroll tax issues, the financial penalties associated with them, and how our law group can help below. To get help now, contact us today at the Timothy S. Hart Law Group, P.C.

The Basics of Payroll Taxes

As an employer, it’s your legal duty to withhold taxes from your employee wages and send that money to the IRS. The IRS uses payroll tax revenue to fund programs like Social Security and Medicare. An employer’s legal duty to withhold taxes from employees stems from the Federal Insurance Contribution Act, which is also why these taxes are often termed ‘FICA’ taxes. An employee’s withheld taxes are referred to as trust fund taxes. This includes the employee’s payments for Social Security and Medicare, as well as the income tax withheld from their paychecks. When employers make these payments, they also pay their matching contributions to Social Security and Medicare.

Due Dates for Payroll Taxes

Payroll taxes should be withheld from paychecks and then paid to the IRS monthly or semi-weekly. If an employer accumulates over $100,000 in payroll taxes, they generally need to make a deposit by the next business day. You must deposit payroll tax payments on the EFTPS. You cannot mail them in. 

Due Dates for Payroll Tax Returns

Employers also have to file payroll tax returns. Generally, these are due quarterly on April 30, July 31, October 31, and January 31 or the following business day. Very small employers and agricultural employers can apply to file annually.

Making Federal Unemployment Payments

On top of filing Employer’s Federal Tax Returns, employers also must file Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return). Your FUTA payment is based on the wages you paid your employees, but you don’t withhold these payments from their checks. Rather, this is an expense that you (the employer) pays directly.

Issuing W2s to Your Employees

Finally, every year, you must issue a W2 (Wage and Tax Statement) showing how much you paid your employees and how much you withheld in Social Security, Medicare, federal income tax, and state income tax, if applicable in your state. 

Who is Responsible for Unpaid Payroll Taxes?

Generally, the employer who distributes payments and withholds taxes is responsible for paying payroll taxes to the IRS. Typically, if the IRS assesses a penalty for not paying payroll taxes, it will go to the employer. However, the trust fund recovery penalty is one of the few IRS penalties that can be assessed on a variety of other people.  Other parties could potentially be held accountable, too, like business partners, a third party you hired to manage payroll, or even employees themselves, but these situations are very rare. These parties are typically only held accountable when they’ve benefited from the failure to withhold payroll taxes and knew that they should’ve given that money to the IRS instead. For example, if the head of your accounting department decides to pay a supplier rather than make a payroll tax deposit, they could be held personally liable for the payroll tax penalties. However, if the owner of the business tells the accountant to cut the checks this way and the accountant is not involved in the decision-making process, they are relatively unlikely to be held accountable. 

Common Payroll Tax Issues

Most payroll tax issues occur because employers don’t understand the right way to file, withhold, match, and submit payroll taxes. That said, most payroll tax issues can be avoided with the right education before even becoming responsible for payroll taxes. Here are some of the most common issues that can lead to fines or penalties.

Misclassifying Employees

Misclassifying employees is one of the top problems when it comes to payroll. If you classify a worker as an independent contractor, for instance, then you’ll no longer be required to withhold taxes. The employee will be on the hook for submitting those taxes themselves.  Under the right circumstances, this arrangement is legal, but you need to make sure that you and your contractor understand the tax arrangement you’re entering into before they agree to the job. If you misclassify an employee and don’t submit taxes when you should have, then you could later find yourself owing the IRS a hefty amount that includes unpaid taxes and penalties.

Failure to Deposit Withheld Taxes

Another common problem is failing to pay the taxes you withheld. Too often, businesses will utilize funds set aside for tax withholding for other purposes. If that money gets spent, then the business may not have enough money to cover the deficit when tax time comes around. 

Miscalculating Payroll Taxes

Even worse, employers could fail to withhold the proper tax amount to begin with, which will result in a necessary correction. If the error is discovered in the same year that you paid the wages, then you can generally correct the error with the IRS. Since these situations can become very complicated quickly, it’s best to consult with a lawyer if you’ve failed to withhold the proper taxes on your employees.

Unpaid Payroll Tax Penalties: An Overview

When you don’t pay the IRS the proper amount of payroll tax withholdings on the due date, you’ll face consequences. The penalties are usually financial, but the IRS can pursue other types of consequences if your case progresses and you fail to communicate with the agency. Here is an overview of the penalties for unpaid payroll taxes:

Late Deposit Penalty

Once you’re a day late on payroll tax deposits, you’ll immediately acquire a 2% penalty fee. That means you’ll owe all of your payroll taxes plus an additional 2% for being late. If you don’t meet that deadline and you become over six days delinquent, then that penalty increases to 5%. When you’re 16 days late, that penalty doubles to 10% of the taxes due. At that point, if you’re still late, the IRS will send you a notice. If you don’t respond within 10 days of the notice, the penalty goes up to 15% of your overall burden.

Trust Fund Recovery Penalty

The Trust Fund Recovery Penalty is one of the IRS’s highest penalties. It can get up to 100% of your taxes due. This is the penalty that the IRS can levy against multiple different people at your company. 

Other Penalties for Delinquent Payroll Taxes

Unfortunately, late deposit and trust fund recovery penalties aren’t the only types of penalties you might face. Here are a few other types of consequences that could be leveraged against you depending on the specifics of your situation:
  • New requirements on future payroll tax deposits (usually requires you to submit payroll taxes within two days of withholding them).
  • Increasing interest fees on your unpaid payroll taxes.
  • Failure-to-file penalties.
  • Criminal charges.
  • Civil fees of up to $5,000 for filing fraudulent returns.
In general, the IRS won’t levy severe consequences unless they believe you’re knowingly and willingly attempting to avoid filing or paying the taxes you owe. Usually, if you get behind, you will just incur a few penalties, and then you’ll need to pay the balance due.

How to Resolve Unpaid Payroll Taxes With the IRS

Unpaid payroll tax penalties can wreak havoc on your finances, so it’s always best to attempt to resolve them as soon as possible. As you can imagine, paying off what you owe in full to the IRS in one big lump sum is your best option. Often, that’s not possible, though, especially if your unpaid payroll tax problems only became apparent after an audit. The good news is that the IRS has an incentive to work with you instead of further penalizing you. The sooner you pay what you owe, the less resources the IRS has to devote to collection efforts. Below, we’ll go over some of the most common solutions utilized by businesses that have unpaid payroll tax issues.

Agree to a Payment Plan

If you can’t pay off the full amount you owe, then your next best option might be to agree to a payment plan with the IRS. In a nutshell, this payment plan will mean that you’ll need to give the IRS monthly payments until you pay off the entire balance you owe, including late fees, interest charges, and other penalties.  Once you agree to a payment plan, you’ll be walking on a tightrope with the IRS. You don’t want to miss a payment or incur more tax debt, or your payment plan may go into default.  Note that the rules for payment plans are different for individuals and businesses. There are also different rules depending on the structure of your business and whether or not you’re still operating. Generally, you can get up to two years to pay off business taxes if you’re still operating, and you can only get more time if you’re out of business. 

Ask About Penalty Abatement

Depending on your circumstances, it might be possible to have some of your penalties abated or removed. The IRS only does this in limited circumstances, though, so don’t assume that you can have your penalties removed even if you are going through a genuinely difficult financial situation. It’s particularly difficult to get relief once a trust fund recovery penalty has been assessed. 

Offer in Compromise

When you’re genuinely unable to settle your tax debt, and you can prove that to the IRS, they may be willing to work with you on reducing your overall tax burden while still requiring you to pay back the bulk of what you owe. To be eligible for an offer-in-compromise agreement, the IRS will look over your entire financial situation and consider your ability to pay.  If they believe your business does have the ability to pay, then they won’t agree to an offer in compromise. Instead, you’ll need to agree to a different form of payment plan. You may struggle to get an offer if you’re still in operation, but this can vary based on the situation.

Unpaid Payroll Taxes: FAQs

Getting into a delinquent tax situation with the IRS can feel very intimidating, especially if you have an entire business relying on your financial decisions. In general, it makes the most sense to talk to a tax lawyer who can give you solid, personalized legal advice that you can rely on to resolve your tax situation. If you still have some questions, then we’ll go over a few commonly asked questions below, but remember that a tax attorney’s advice is preferred.

Can You Go To Jail for Unpaid Payroll Taxes?

Yes but not usually. The IRS has the authority to charge any responsible person for the business’s failure to pay payroll taxes. Typically, criminal charges are not pursued unless the IRS determines the person is willfully and intentionally avoiding paying what they owe, but it is possible to face criminal charges when you become overly delinquent.

Can You Remove a Payroll Tax Penalty?

Yes. It is possible to have penalties removed or abated if you can prove that there was reasonable cause for the unreported payroll taxes or delinquent payments. In order to be considered eligible for abatement, you’ll need to meet certain requirements, though. 

Do I Need a Tax Lawyer to Manage Payroll Tax Penalties?

While hiring a tax lawyer isn’t necessary to resolve your tax situation with the IRS, it’s often a good decision. A lawyer will be your best advocate and go-to resource to help you better understand tax laws, your obligations, and your rights. What’s more, a tax lawyer can help you make plans to better navigate your payroll tax situation going forward.

Are You Currently Dealing With Unpaid Payroll Tax Problems?

Are you currently facing problems associated with unpaid payroll taxes? Has your account become delinquent to the point where you’re worried about the increasing financial and legal consequences you could face? Unfortunately, in severe situations, it is possible to face jail time if you owe payroll taxes to the IRS and you intentionally and willfully attempt to avoid paying what you owe. The good news is that you’re unlikely to face such severe consequences if you’re working with the IRS in good faith to pay back what you owe. Depending on your situation, it might be a good idea to consult with a tax attorney who can help you make informed decisions on how to handle your unpaid payroll tax problems. Here at Timothy S. Hart Law Group, P.C., we’re prepared to help. Schedule a consultation using our online form now to get in touch about your tax problems and get started on your resolution journey today.

Attorney Timothy Hart

Timothy S Hart, the founding partner of the tax law firm of Timothy S. Hart Law Group, P.C. is both a New York Tax Lawyer & Certified Public Accountant. His area of expertise includes innovative solutions to solve your Internal Revenue Service and New York State tax problems, including tax settlements through the Federal and New York State offer in compromise programs, filing unfiled tax returns, voluntary disclosures, tax audits, and criminal investigations. [ Attorney Bio ]