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Updated for 2011

Employment Tax Deposit Penalties

IRS Crack Down:

The IRS is cracking down on employment tax violators. In fact, last year (2007) it teamed up with more than half the states to put the squeeze on violators.

A key issue is classification of workers. A worker may be classified as either an employee or an independent contractor.

When a worker is hired and classified as an independent contractor, federal and state employment-related taxes are avoided.

Intentionally misclassifying workers as independent contractors to avoid paying employment taxes is a serious matter. Don't be tempted to engage in this practice. Check out this article in the Wall Street Journal.

If taxes are not deposited properly or timely, the IRS will impose a deposit penalty. Penalties are generally based on a percentage of the unpaid tax liability.

How Deposit Penalties Are Determined

Late deposit penalty amounts are determined using calendar days, starting from the due date of the liability.

2% - Deposits made 1 to 5 days late.
5% - Deposits made 6 to 15 days late.
10% - Deposits made 16 or more days late. Also applies to amounts paid within 10 days of the date of the first notice the IRS sent asking for the tax due.
10% - Deposits made at an unauthorized financial institution, paid directly to the IRS, or paid with your tax return (see exceptions next).

Order in Which Employment Tax Deposits Are Applied

Deposits are generally applied to the most recent tax liability within the quarter.

If you receive a failure-to-deposit penalty notice, you may designate how your deposits are to be applied in order to minimize the amount of the penalty if you do so within 90 days of the date of the notice.

Follow the instructions on the penalty notice you receive.

For more information on designating deposits, see
Rev. Proc. 2001-58.

You can find Rev. Proc. 2001-58 on page 579 of the Internal Revenue Bulletin 2001-50 at www.irs.gov/pub/irs-irbs/irb01-50.pdf

Example:

Jack Broomhead, who operates Keep-It-Clean, Janitorial, a sole proprietorship, employs two people.
Jack is required to make a deposit of $2,000 on June 15 and $2,500 on July 15.
Jack forgets to make the June 15 deposit.
Jack makes a $4,000 deposit on July 15.

Under the deposits rule, which applies deposits to the most recent tax liability, $2,500 of the $4,000 deposit made in July is applied to the July 15 deposit first.

The remaining $1,500 is applied to the June deposit. Consequently, $500 of the June liability remains undeposited.

Their will be an underdeposit penalty determined from the due date of the liability.

IRS Employment Tax Penalty Refund Offer

Penalty refund offer:

If you already paid employment tax penalties, the IRS has an FTD (federal tax deposit) penalty refund offer.

How it Works:

This offer gives a late FTD depositor the opportunity to receive a one time penalty refund.

How to Qualify:

You must enroll in EFTPS.
You must use EFTPS for one year (four consecutive quarters).
You must make all four 941 payments on time and fully pay the penalty.
- 941 payments are employment taxes (reported on Form 941). They include:
  - Federal income taxes
  - The employee's share of social security and Medicare taxes
  - The employer's share of social security and Medicare taxes

Employment Taxes

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Need Some Deductions for 2011?

Employment Tax Deposit Penalties