The failure-to-deposit (FTD) penalty for payroll taxes

Under IRC section 6656, the penalty is a percentage of the unpaid deposit:

• 2% — deposited 1 to 5 calendar days late.
• 5% — 6 to 15 days late.
• 10% — 16 or more days late, or paid directly to the IRS or with the return instead of through EFTPS when electronic deposit was required.
• 15% — still unpaid more than 10 days after the first IRS notice demanding payment, or the day the IRS demands immediate payment.

Interest at 7% a year also runs on the penalty once assessed.

By default the IRS applies deposits to the most recent liability within the quarter, which can make an early late deposit cascade into penalties on later ones. You can designate how a deposit is applied within 90 days of the penalty notice, which sometimes lowers the total. The IRS calculates penalties from your liability schedule (Form 941 line 16 or Schedule B); if that's missing or wrong, it averages liability across the quarter — the subject of CP207.

Most FTD penalties trace back to the wrong schedule. Monthly depositors deposit by the 15th of the following month; semiweekly depositors deposit by Wednesday or Friday after payday; and any day's accumulated liability of $100,000 or more must be deposited the next business day. Your schedule comes from your lookback period — see CP136 and federal payroll deposit schedules.

• First Time Abate — if the business had no significant penalties in the prior 3 years and is current on filing and payment arrangements.
• Reasonable cause — natural disasters, serious illness of the person responsible, inability to get records, or reliance on a payroll provider in some limited circumstances. Ordinary cash-flow shortfalls generally don't qualify.
• Administrative waivers — for example, the IRS can waive the penalty for a first-time depositor's or schedule-change mistake in some cases.

The IRS sometimes declines to charge the penalty and says so with CP276B. See payroll penalty abatement for the request process.

A $20,000 deposit made 20 days late costs 10% — $2,000 — before interest. If it then sits unpaid past an IRS demand, the rate becomes 15%. Take the business assessment to see whether penalty relief is likely worth exploring for your situation.