United States Employers are responsible for withholding federal income and payroll taxes from their employee’s paychecks and remitting those withheld payroll taxes to the government. Otherwise, the employer will be subject to the failure-to-deposit (FTD) penalty of up to 15% or even criminal and civil sanctions for willfully failing to pay employment taxes.
The failure to deposit penalty usually involves the employees’ Social Security, Medicare, federal income, and unemployment benefits taxes.
How to Avoid the Failure to Deposit Penalty
The tiered FTD penalty amount depends on the period of delay in paying the payroll taxes to the government. To reduce tax penalties, employers must remit the funds as soon as possible. Another option is to get the FTD penalty waived based on reasonable cause or request the first-time penalty abatement (FTA).
To avoid the FTD penalty, employers must be aware of their businesses’ deposit schedules and make timely deposits using an electronic funds transfer with the Treasury. Also, employers must avoid using unpaid tax deposits to finance their business lest they incur tax penalties and interests.
Even a one-day delay from the deposit schedule will result in the FTD penalty beginning to accrue. Aside from delay, employers will be liable for the FTD penalty if they do not use the correct payment method or deposit the proper amount. Delay of payment will only lead to a penalty increase of 15%. Also, there is another 10% penalty when the deposit is not made by electronic funds transfer.
Trust Fund Recovery Penalty
Worst case scenario, the IRS determines that the employer willfully failed to remit payroll taxes. Such willful failure to deposit payroll taxes will lead to assessment of the Trust Fund Recovery Penalty (TFRP). Also, the persons responsible for collecting and submitting payroll taxes, but who willfully fail to do so will likewise be liable for the Trust Fund Recovery Penalty equal to 100% of the unpaid trust fund taxes.
What Constitutes “Willful”
“Willful” means a voluntary, conscious, and intentional act, which is contrary to being accidental, of failing to remit trust fund taxes. Courts pointed out the presence of willfulness if a taxpayer (can be an employer or a responsible person) knew of the nonpayment or recklessly set aside whether the accomplishment of payments was on time. Acts constituting willfulness also exist when the responsible person prioritizes the payment of other creditors over the IRS or neglects their duty to use all available current and future unencumbered funds of the corporation to pay the taxes. Further evidence of willfulness is a failure on the part of the responsible person in assessing and immediately acting upon learning of the tax deficiencies.