Multiplier Logo
Loading Animation Image


7 Mins Approx

What Are Unpaid Payroll Tax penalties? Things You Must Know

Ever wondered what will happen if you don’t pay payroll taxes?

Payroll taxes are not yet known to many business owners. And even if they know, they are not aware of every minor detail.  For example, did you know that the Internal Revenue Service (IRS) will assess interests and penalties on the employer’s account in case of failure to collect, report, and remit payroll taxes?

In fact, even though you outsource your payroll taxes, you will remain responsible for the payroll taxes-related obligations and work.

Want to know more about payroll taxes and the involved penalties? This blog will help you with that. Let’s get started.

A Brief Recap of Payroll Taxes

Employers pay payroll taxes as a contribution and employees as a percentage deduction from their salaries.  You generally pay these taxes to the local, state, or federal governments. A few examples of payroll taxes include Social Security Tax, Medicare Tax, Federal and State Unemployment taxes, and local taxes.

Payroll taxes of employees are to be withheld and paid by employers. You will be personally liable to withhold and pay income taxes and other payroll taxes to the state or federal agencies as an employer. Non-payment of payroll taxes on time may result in paying payroll tax penalties.

What Are Unpaid Payroll Tax Penalties?

Let’s discuss unpaid payroll tax penalties now. As an employer, if you fail to meet your payroll duties, you’ll get penalties. The IRS lists several penalties and requirements in the IRS Publication 15: Employer’s Tax Guide. However, from this list, a few are common compared to others.

Blunders are often seen for Form 941 taxes – withholding and Federal Insurance Contributions Act (FICA) taxes. But few of the missteps apply to other similar forms. Here’s a list of a few common payroll tax penalties.

  • IRS penalties are applicable when you fail to communicate information returns to employees and other payees on Forms W-2 and Form 1099-MISC respectively. The size of your business determines the amount of penalty. If you are a large company with gross revenue of over $5 million, you pay more. Other factors that decide the amount of penalty are how late you make the payment, the type of error made, or whether you have made the payment at all.
  • If you fail to file Form 941 and a few other similar forms, you must pay payroll tax penalties. The amount of these penalties depends on the time frame, that is, how late the payment was made. So, the percentage of payroll tax penalties may range anywhere between 2% to a maximum of 15%.
  • Non-payment of payroll taxes on the due date results in Trust Fund Recovery Penalty (TFRP). If you have withheld Social Security tax but didn’t remit it to the government, a penalty for not paying social security tax will be charged. The same applies to income tax and Medicare Taxes.

Please note here that TFRP is the same as unpaid tax. The interest on taxes will accrue from the due date.

The TFRP penalty to take action requires an ‘intentional’ or ‘willful’ failure. However, you will still be charged with penalties for late payments even if you prove that your failure to report or pay the taxes was not intentional.

Penalty for Not Paying Payroll Taxes

Did you know that about 70% of the yearly revenue that IRS collects comes from payroll taxes?

And about 18 percent of the US tax gap comes from the underreported and unpaid payroll taxes. This huge contribution of unpaid payroll taxes in the tax gap shows payroll deposit penalties when a business fails to pay payroll taxes.

Non-payment of payroll taxes calls for a bill from the IRS and a penalty too, is likely. Plus, the IRS states that non-compliance to the employment tax laws by employers is subject to civil as well as criminal penalties.

Let’s see what are the types of penalties you can get:

The IRS charges penalties based on:

  • How late you made the payment
  • The amount you owe

The table below will give you a clearer picture of the time frames and related payroll tax penalties.

Number of Days Late Percentage of Penalties
1- 5 days 2%
  6-15 days 5%
More than 16 days 10%
Within 10 days of first notice from the IRS 15%

To explain further, let’s take an example. Say you are responsible for making a payroll tax deposit of $3000 to the IRS. You are late by 16 days. The IRS will charge you a payroll deposit penalty of $300, indicating that you would owe $3300 to the IRS in total. Note that this amount excludes any state penalties that you might be obligated to pay.

Another thing you must know is that missing a deadline for payroll tax deposits not only attracts penalties. Unfortunately, you also are required to face interest rates. As per IRS, the interest rate you are to pay may range between 3 percent to 6 percent of the amount you owe.

Besides payroll tax penalties and interests, the IRS could also file a tax lien if you fail to clear your tax debt. FYI, a tax lien is a claim against your property.

Further, if the IRS thinks that you are intentionally evading taxes, then the penalty could be heftier than what you think, you may be subject to jail time, or both.

Note that filing your reports late attracts additional penalties.

What are the Most Common Reasons for Employers to not Pay Payroll Taxes?

Non-payment of payroll taxes on time attracts payroll tax penalties and no employer would want that!

While the reasons behind not paying payroll taxes may vary from person to person, we were able to identify a few common reasons. Here’s the list for your reference:

1. Forgetting to deposit taxes

This one tops our list. Suppose you withhold the taxes from employee salaries and set the funds aside. But the workload kept you so busy that paying the taxes just skipped your mind. You forget the due date of the tax deposit and fail to make the payment.

2. Forgetting to withhold taxes

This is another common reason where employers forget to withhold taxes altogether. Suppose, you as an employer did not withhold state taxes from employee compensation. As a result, you fail to make the deposit.

3. Using payroll tax funds for paying creditors

This is another common reason for not paying payroll taxes. Suppose you withhold taxes and, set aside the payroll tax funds. But your calendar tells you that the due date isn’t near. So, you borrow your payroll tax fund during a negative cash flow period. Consequently, when your due date arrives, you have no funds.

4. Coping with the aftermath of a natural disaster

This can actually be a genuine reason behind not paying payroll taxes. It may so happen that you might be dealing with the consequences of a natural disaster. Therefore, you might not be able to pay your taxes on time.

5. Failing to keep up with the changes in depositing schedules

might be another reason for the non-payment of payroll taxes. Your tax deposit schedule might change and you may not be aware of that. Consequently, you might not be able to deposit your taxes on time.

Tips to Avoid the Penalty for an Employer not Paying Payroll Taxes

As an employer, it’s quite obvious that you will not want to attract payroll tax penalties. So, we have listed a few tips that might help you refrain from dealing with penalties.

1. Avoid borrowing from your payroll tax funds

We have listed borrowing from payroll tax funds as one of the most common reasons for not paying taxes. Hence, you must be alert about not committing this mistake. Even if you’re short on cash and are tempted to do so, avoid doing it. However, if you’re in dire need of funds to pay an annoying creditor, then ensure that you replace the borrowed funds.

You can consider creating a cash reserve for times of negative cash flow. Also, you can try opening a separate payroll account for the collected and contributed taxes. Both ways, you’ll be able to save funds for paying off taxes.

2. Don’t forget to withhold, contribute, and set aside taxes

Withhold taxes from your employee salaries. Set aside your tax contribution each time you withhold. This will help you maintain a system and remember that you are required to withhold and contribute payroll taxes. You can also set reminders or use payroll software for doing so.

3. Use payroll software to your advantage

Try using payroll software to avoid paying payroll tax penalties when you have a million things to keep track of. A full-service payroll software collects and calculates payroll taxes. The payroll service provider, then, on your behalf, remits the taxes to the appropriate tax agencies.

4. Keep yourself updated with changing tax deposit schedules

To avoid paying payroll tax penalties, make sure that you are up to date with the tax deposit schedules. Not coping with these schedule changes may result in non-payment of payroll taxes or late payment.

5. Maintain proper employee classification

Often employers mix up the employee classification to evade taxes. This means to avoid paying taxes, employers may list employees as independent contractors in the business. If caught, the penalties would be much higher. So, keep an eye on the employee classification list. Even if you list an employee as an independent contractor by mistake, the consequences might not be favorable.

Final Words

If you’re an employer, you’re already busy with lots of other stuff. There’s no need to take the burden of taxes and penalties on your shoulder. Trust Multiplier with this. We are an HR outsourcing agency taking care of:

  • Global payroll
  • Tax and penalties
  • Employee onboarding
  • Global employment benefits

Want to know more? Book a demo now!

Binita Gajjar
Binita Gajjar

Content Marketing Lead

Binita is a Content Marketing Lead at Multiplier

Employ the best person for job, regardless of location

Employ the best person for job, regardless of location

Footer 24x5 New Img2x

An all-in-one international employment platform