Payroll tax
Payroll tax attorney for unpaid Form 941 taxes and deposit penalties.
A business that falls behind on payroll taxes can face three penalties on the business, each with its own rate: the deposit penalty under section 6656 for late or short deposits, and, under section 6651, the late filing addition for a Form 941 filed late and the late payment addition for tax shown on the return and not paid. A person responsible for paying over the withheld taxes who willfully fails to do so can also be assessed the trust fund part personally.
Mr. Powell of the Law Office of Alexander Powell, PLLC handles unpaid Form 941 balances and payroll tax penalties for employers, and the trust fund recovery penalty for the owners, officers, and bookkeepers the IRS investigates. He is admitted in the District of Columbia and Maryland, works from 1629 K Street NW, Suite 300 in Washington, DC, and handles IRS matters nationwide.
26 U.S.C. sections 6331, 6651, 6656, and 7436, IRS Publication 15, IRS Tax Tip 2026-59, and the IRS pages on depositing employment taxes, the failure to deposit penalty, administrative penalty relief, the trust fund recovery penalty, and Form SS-8 were checked on govinfo.gov, law.cornell.edu, and irs.gov on November 8, 2026. The notice in hand controls. This page is not legal advice.
The deposit penalty
Two, five, ten, or fifteen percent.
An employer generally deposits the federal income tax it withholds and both the employer and employee shares of Social Security and Medicare tax by electronic funds transfer, on a monthly or semiweekly schedule, and reports them each quarter on Form 941. IRS Publication 15 adds that taxes of $100,000 or more accumulated on any day are deposited by the next business day, and that an employer whose Form 941 liability for the current or prior quarter is less than $2,500 may, on its conditions, pay with the return. Under 26 U.S.C. section 6656, a deposit that is late or short carries a penalty of 2 percent if the failure is for not more than 5 days, 5 percent if the failure is for more than 5 days but not more than 15 days, and 10 percent if the failure is for more than 15 days, unless the failure is due to reasonable cause and not due to willful neglect. The rate is 15 percent when the tax is not deposited on or before the earlier of the day 10 days after the date of the first IRS delinquency notice or the day the IRS gives notice and demand for immediate payment in the special cases the statute lists.
Do the payroll deposit penalty percentages add together?
No. The IRS says the penalty amounts don't add up: if a deposit is more than 15 calendar days late, the IRS does not add a 10% penalty to the earlier 2% and 5% penalties, and the total penalty is 10%. Section 6656(b)(1) defines one applicable percentage for each failure, measured by how many days the deposit is late.
Can the IRS remove a payroll deposit penalty?
It can. Section 6656(a) imposes the penalty unless the failure is due to reasonable cause and not due to willful neglect, and IRS Publication 15 says a business that receives a penalty notice can explain why it believes reasonable cause exists. The IRS's Automatic Exemption from Penalty, for 2026 quarterly returns and later, lists Form 941 among the eligible returns: the deposit penalty is not assessed for a business that meets the IRS's published compliance-history tests for the previous 12 consecutive quarters. For business returns those tests include no penalty in that period other than one later abated for reasonable cause or IRS error, and no waiver of the deposit penalty four or more times. During the transition, the IRS says qualifying taxpayers may request First Time Abate.
Is there a waiver for a new employer's first deposits?
Yes, in two cases. Under section 6656(c), the IRS may waive the penalty on an inadvertent failure to deposit employment tax that occurs during the first quarter a business was required to deposit, or that relates to the first deposit after the business's deposit frequency changes, if the return was filed on or before the due date and the business meets the net worth and size limits that section 7430 applies to awards of costs. IRS Publication 15 states those limits for a business as a net worth of no more than $7 million and no more than 500 employees.
Can a business choose which period a payroll deposit is applied to?
Yes, for the deposit penalty, within 90 days of the penalty notice. Under section 6656(e)(1), a deposit is applied to the most recent period or periods within the specified tax period to which the deposit relates, unless the person making the deposit designates a different period or periods. Under section 6656(e)(2), the designation may be made only during the 90-day period beginning on the date of a notice that the penalty has been imposed for that tax period.
Official source: 26 U.S.C. 6656
Official source: IRS, Failure to Deposit Penalty
Official source: IRS, Depositing and reporting employment taxes
Official source: IRS Publication 15, Employer's Tax Guide
Official source: IRS Tax Tip 2026-59, automatic penalty relief
Official source: IRS, Administrative penalty relief
The work
Quarter by quarter.
Read the notice
Identify the quarters, the tax and each penalty on the notice, and the date printed on it, including the 90 days to designate deposits after a deposit penalty notice.
Rebuild the deposit record
Line up each payroll, each required deposit date under the business's monthly or semiweekly schedule, and each deposit actually made, quarter by quarter.
Test each penalty
Check the days late against the 2, 5, 10, and 15 percent rates in section 6656, and the late filing and late payment additions against section 6651, before any request for relief.
Protect the people
Identify who may be named in a trust fund recovery penalty investigation and prepare them before any Form 4180 interview.
When I take on a payroll tax matter.
I take on a payroll tax matter when a business is behind on deposits or Form 941 balances and the IRS has sent a penalty notice, a Revenue Officer has made contact, or an owner, officer, or bookkeeper has been asked to sit for a Form 4180 interview. The deposit penalty, the late filing and late payment additions, and the trust fund recovery penalty each run on their own rules, so each is tested separately.
For District of Columbia and Maryland withholding, the trust fund recovery penalty page covers the federal personal penalty, the District's own personal-liability rule, and the Comptroller of Maryland's guidance on officers.
Questions
Common questions.
What are the penalties for a late Form 941 or an unpaid balance?
They are separate from the deposit penalty. Unless the failure is due to reasonable cause and not due to willful neglect, 26 U.S.C. section 6651(a)(1) adds 5 percent of the unpaid tax for each month or fraction of a month a return is late, and section 6651(a)(2) adds 0.5 percent of the unpaid tax shown on a return for each month or fraction of a month after its due date, each not exceeding 25 percent in the aggregate. Section 6651(d) raises the late payment rate to 1 percent for months beginning after the day 10 days after the IRS gives notice of intent to levy. For a month in which both apply, section 6651(c)(1) reduces the late filing addition by the late payment addition.
Can owners or officers be personally liable for unpaid payroll taxes?
Yes, for the trust fund part. The IRS says the trust fund recovery penalty may be assessed against any person who is responsible for collecting or paying withheld income and employment taxes and willfully fails to collect or pay them, and that it may apply if the unpaid trust fund taxes cannot be immediately collected from the business. IRS Publication 15 says the penalty is 100% of the unpaid trust fund tax, and the IRS computes it from the unpaid income taxes withheld plus the employee's portion of the withheld FICA taxes. The process, from the Form 4180 interview to the Letter 1153 appeal, is on the trust fund recovery penalty page.
What if the IRS says workers were employees, not contractors?
A business can ask the Tax Court to decide. Under 26 U.S.C. section 7436(a), when an IRS examination determines that individuals performing services for a business are its employees for employment tax purposes, or that the business is not entitled to relief under section 530 of the Revenue Act of 1978, the Tax Court may determine whether that determination is correct and the proper amount of employment tax. Under section 7436(b)(2), if the IRS sends notice of the determination by certified or registered mail, the pleading must be filed before the 91st day after the date of mailing. Separately, the IRS says firms and workers file Form SS-8 to request a determination of the status of a worker.
Official source: 26 U.S.C. 6651
Official source: 26 U.S.C. 6331
Official source: 26 U.S.C. 7436
Official source: IRS, Employment taxes and the TFRP
Official source: IRS, About Form SS-8
Related pages
Related payroll and collection resources.
- Trust fund recovery penaltyPersonal liability for unpaid trust fund taxes, the Form 4180 interview, and Letter 1153.
- IRS penalty reliefReasonable cause, first-time relief, and penalty disputes.
- IRS collectionsLiens, levies, and payment options for an assessed balance.
- IRS levyBank, wage, and accounts receivable levies.
- IRS installment agreementPaying an assessed balance over time.
- U.S. Tax CourtPetitions, case development, settlement, and trial.
- Unfiled returnsUnfiled returns, IRS substitute returns, and late-filing penalties.
Send the quarters and the notice.
Say which Form 941 quarters are behind, which notices have arrived and their dates, and whether a Revenue Officer has asked anyone for an interview. Send only a high-level summary.
Requesting a consultation does not make Mr. Powell your lawyer, provide legal advice, or protect a deadline.
Law Office of Alexander Powell, PLLC. 1629 K Street NW, Suite 300, Washington, DC 20006.