It is important to understand information about the penalty that applies if employers fail to deposit employment taxes on time. Unless the failure is due to reasonable cause and not willful neglect, a penalty equal to a percentage of the amount of the underpayment is imposed for failing to make required tax deposits with government depositories. Overall, failing to deposit employment taxes can lead to very severe penalties.
Amount of Penalty of Failure to Deposit Employment Taxes
The percentage is 2% if the amount of the underpayment is properly deposited not more than five days after the due date; 5% if the amount of the underpayment is properly deposited more than five days but not more than 15 days after the due date; and 10% if the amount of the underpayment is properly deposited more than 15 days after the due date. Under an exception, the applicable percentage is 15% if the tax isn’t deposited on or before the earlier of the day ten days after the day of the first delinquency notice to the taxpayer or the day on which notice and demand for immediate payment is given.
Avoiding Failure to Deposit Penalty
In order to avoid the failure to deposit penalty, taxpayers must navigate complex rules. A particularly complex feature of the deposit rules is the schedule for making required deposits, which changes depending on the tax liability so that taxpayers must carefully monitor their tax liability to avoid a penalty.
Penalty if employers fail to deposit employment taxes
An employer’s deposit schedule for a calendar year is calculated using a one-year lookback period ending on June 30 of the preceding year. An employer is a monthly depositor (depositing taxes for each calendar month by electronic funds transfer (EFT) by the 15th day of the following month) if the taxes he reported in the lookback period didn’t exceed $50,000. If the taxes exceeded $50,000, the employer is a semi-weekly depositor. However regardless of whether he normally falls into one of these categories, if an employer has $100,000 or more of accumulated employment taxes on any day, the taxes must be deposited by electronic funds transfer by the close of the next business day.
Small Business Failure to Deposit Penalty Exception
On the other hand, small employers benefit from a de minimis rule allowing deposits to be made with employment tax returns. EFT is used for all federal tax deposits, unless IRS provides an exemption. But, an employer with a deposit liability of less than $2,500 for a return period may (1) remit employment taxes with its quarterly or annual tax return, (2) voluntarily make deposits by EFT, or (3) use other methods of payment as provided by the instructions relating to the return. Businesses without a computer may use the ACH debit option, which requires a telephone call, to schedule an EFT payment.
Failure to Deposit Penalty
For purposes of the failure to deposit penalty, IRS applies deposits to the most recently ended deposit period or periods within the specified tax period to which the deposit relates. However, the depositing taxpayer is allowed, during the 90 day period beginning on the date of a penalty notice, to designate a period or periods to which a deposit is to be applied for purposes of the failure to deposit penalty.