Payroll Failure to File, Failure to Pay, and Deposit Penalties

In a previous blog, we discussed the penalties for late individual annual tax returns.  This blog reviews the penalties for late payroll tax returns.  The failure to file and failure to pay penalties for payroll returns are the same compared to individual tax returns.  However, there is also a failure to deposit penalty for payroll returns.

Internal Revenue Code (IRC) Sections
IRC Sec. 6651(a)(1), the failure to file a tax return penalty is 5% per month not filed.  The penalty cannot exceed 25%.  It will take 5 months to reach the maximum penalty of 25%.  If payroll tax return with a tax balance of $1,000 is more than 5 months late, the penalty will be $250 (1000 * 25%).

IRC Sec. 6651(a)(2), the failure to pay the amount owed before the due date of the tax return is 0.5% per month not paid.  The penalty cannot exceed 25%.  It will take 50 months to reach the maximum penalty of 25%.  If the payroll tax return with a balance of $1,000 is paid 5 months late, the penalty is $25 (1000 * 2.5%).

IRC Sec. 6656(b)(1)(A), Failure to make deposit of taxes.
(i)   Penalty is 2% if the failure is not more than 5 days
(ii)  Penalty is 5% if the failure is more than 5 days but less than 15 days
(iii) Penalty is 10% if the failure is more than 15 days
There is a special rule if the IRS sends a tax bill for payment and the taxpayer does not pay within 10 days or if the IRS determines that collecting the taxes is in jeopardy.  The failure to deposit penalty is 15%.

Interest is charged on both the tax and penalties owed.
IRC Sec. 6621(b), the interest rate is the Federal short-term rate plus 3%.  For October 2012, the Federal short-term rate is 0.23%.  Therefore, interest on taxes and penalties for October 2012 will be 3.23%.

Example Calculation
Compared to individual tax returns, the penalties for late filing and late paying a payroll tax return are stiff.  Below is a calculation for 4 periods of delinquent tax returns filed in October of 2012.

Period Tax Penalties Interest Total
1st Quarter 2009 10,000.00 5,350.00 1,766.26 17,116.26
2nd Quarter 2009 20,000.00 10,400.00 3,234.53 33,634.53
3rd Quarter 2009 15,000.00 7,575.00 2,119.74 24,694.74
4th Quarter 2009 30,000.00 14,700.00 3,956.66 48,656.66
1st Quarter 2009 17,500.00 7,262.50 1,130.56 25,893.06
Total 92,500.00 45,287.50 12,207.75 149,995.25

In this example, the taxpayer would have paid $94,500 in taxes during these 5 periods if the payroll tax returns were timely filed and taxes paid.  However, since the taxpayer filed the payroll returns late without tax deposits, the taxpayer will owe about $150,000.  This is a 50% increase of taxes owed.

Owing payroll taxes is a scary situation.  Call us today and get some reassurance from a trusted professional in your local community!  Call ALG Tax Solutions 855-MI-Tax-Help (855-648-2943) or provide your contact information online.

IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.