What Are the Penalties for Unpaid Payroll Taxes?
Among your responsibilities as an employer is the requirement to collect, report, and pay payroll taxes as required by federal and state laws. If you are a corporate officer or other "responsible party," as defined by the IRS, you may be personally liable for payroll taxes not reported or deposited as required.
The IRS makes it clear that if you use a payroll service or someone else to do your payroll work, including reports and deposits, this does not relieve you as an employer of the responsibility to see that tax returns are filed on a timely basis and that all taxes are paid correctly and on time.
What Payroll Taxes Do I Have to Pay?
Federal and state payroll taxes include:
- Federal and state income taxes which must be withheld from employee pay and paid to the IRS (federal income taxes) and states (state income taxes) as required by law.
- FICA taxes (Social Security and Medicare taxes) withheld from employee pay and matched by employers. FICA taxes must be paid either semi-weekly or monthly, depending on the size of your payroll, and reported quarterly on Form 941.
- Federal unemployment taxes which are paid based on the gross pay of all employees. These taxes are paid quarterly or annually and are reported on Form 940.
- State unemployment taxes, collected, reported and paid according to state laws.
The Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty is a penalty imposed on businesses who collect money, account for that money, and pay that money to tax entities. Sales taxes are a TFRP tax, as are payroll taxes. The TFRP can be imposed by the IRS for:
- Willful failure to collect tax,
- Willful failure to account for and pay tax, or
- Willful attempt in any manner to evade or defeat the tax or the payment thereof.
Note the use of the term "willful," which is defined by the IRS as "intentional, deliberate, voluntary, and knowing, as distinguished from accidental. "Willfulness" is the attitude of a responsible person who with free will or choice either intentionally disregards the law or is plainly indifferent to its requirements." In some cases, a reckless disregard of obvious facts will suffice to show willfulness.
Personal Liability for Payroll Taxes
You as a responsible party for your company can be held personally liable for willful failure to withhold employee pay and payroll taxes or to pay withheld income taxes and other payroll taxes to federal and state agencies.
Penalties are complicated; this list is brief and general. The IRS provides further details on the penalties that will be assessed in Publication 15: Employer's Tax Guide. These penalties are for Form 941 taxes (withholding and FICA taxes) but may also apply to other similar forms.
Failure to file Form 941 and similar forms: 2% 1-5 days late, 5% 6-15 days late, 10% more than 16 days late or within 10 days of first notice from the IRS, maximum 15%.
Trust Fund Recovery Penalty for failure to pay payroll taxes when due, imposed on the responsible party. The IRS says, "If income, social security, or Medicare taxes that must be withheld are not withheld or are not paid, you [as a responsible party] may be personally liable for the trust fund recovery penalty."
Remember, the TFRP is 100% of the unpaid tax (income, social security, and Medicare). In addition to penalties, interest accrues from the due date.
Deposits are applied to the most recent liability, so be careful of making deposits late. Let's say you are required to make a deposit of $1500 every month. You don't make your March 15 deposit, but you make a deposit of $2000 on April 15 to catch up. $1500 is applied to April 15 and $500 to March 15. You may be assessed a penalty for the $1000 un-deposited for March 15.
Other Types of Payroll-Related Penalties
- Even if you can prove your failure to pay or report taxes wasn't "willful," and you avoid having to pay the Trust Fund Recovery Penalty, you can still face fines for late payments.
- You also may be penalized for unpaid payroll taxes if you misclassified workers as independent contractors instead of as employees.
- Failure to prepare W-2 forms for employees and provide them by the deadline (the end of January, for the previous year), may subject you to a $50 penalty for each statement that should have been sent or which was incorrectly prepared.