Payroll Compliance – Federal Payroll Tax Penalties

As a payroll service company as well as a bookkeeping and tax compliance firm, we talk with a lot of small business owners that are in search of help resolving their issues.  When potential clients come to us for payroll, it is usually one of two reasons: 1) they just don’t want to bother with learning the rules and how to comply, or 2) there was a mistake or issue that has caused them to need to take action and they don’t know what to do.  Regarding the latter, a common issue we see when meeting with a potential client is that they received a letter from the IRS charging them with a penalty.  These penalties are typically thousands of dollars and are avoidable. 

Incorrect Federal Payroll Tax Deposits

This is one of the messiest issues that we see.  Nearly all employers will need to deposit payroll either on a monthly or a semiweekly basis.  If you do not pay the tax by the appropriate due date, notices will start to come and the penalties can be shocking.   According to the IRS website, the failure to deposit penalty applies if the employer doesn’t make tax payments:

• On time

• In the right amount

• In the right way

On time means that it is received by the IRS on or before the due date based on your deposit schedule.  The right amount means that the deposit ultimately matches the liability you report on your payroll tax return.  The right way means that it must be paid using the IRS EFTPS system.  That is right, you should not be mailing them a check.  Funny enough, you can write a check to pay the penalty.

How much are the penalties?

Buckle your seatbelt.  These are not cheap.

1-5 calendar days           2% of the unpaid deposit

6-15 calendar days        5% of your unpaid deposit

More than 15 calendar days      10% of your unpaid deposit

After you start receiving notices, the penalty can balloon up to 15% of the unpaid balance.

But wait, there is more…

They charge interest on the unpaid balance and they charge interest on the penalties!

So, if we have a taxpayer that submitted $10,000 16 days late, the penalty is $1,000!  The good news is that the taxpayer saved money by not hiring a payroll service company.  The truth is that it is rarely this clean.  There are usually multiple late payments because it can take a few months before the error comes to light.

Can I reduce these penalties?

There is a chance that the penalties can be reduced.  The IRS will waive penalties if there is a reasonable cause and you acted in good faith.  For the best odds of getting a penalty waived, the taxpayer will likely need some professional help.  It is also worth noting that it usually takes months to get a resolution.  The IRS is slow.

How can a payroll service firm help?

First of all, when we onboard a new client, we get the schedule correct and make the payments on time, in the right amount, and in the right way. 

Second, if there is an issue that has caused you to reach out to our firm, we are equipped to deal with the penalty resolution and get things back on the right track.

In conclusion, if you are interested in avoiding the cost of penalties and paying professionals to get those penalties resolved, then we would be happy to discuss this with you.  When facing these kinds of costs, the lowest overall cost solution in many cases is outsourcing.  Not only that, you can sleep better at night.  So, hire a pro and save yourself the hassle.