Deposit Penalties

Although the deposit penalties information provided next refers specifically to Form 941, these rules also apply to Form 943, Form 944, and Form 945. The penalties won’t apply if the employer qualifies for the exceptions to the deposit requirements discussed under Payment with return , earlier, in this section.

Penalties may apply if you don’t make required deposits on time or if you make deposits for less than the required amount. The penalties don’t apply if any failure to make a proper and timely deposit was due to reasonable cause and not to willful neglect. If you receive a penalty notice, you can provide an explanation of why you believe reasonable cause exists.

If you timely filed your employment tax return, the IRS may also waive deposit penalties if you inadvertently failed to deposit and it was the first quarter that you were required to deposit any employment tax, or if you inadvertently failed to deposit the first time after your deposit frequency changed. You must also meet the net worth and size limitations applicable to awards of administrative and litigation costs under section 7430; for individuals, this means that your net worth can’t exceed $2 million, and for businesses, your net worth can’t exceed $7 million and you also can’t have more than 500 employees.

The IRS may also waive the deposit penalty the first time you’re required to make a deposit if you inadvertently send the payment to the IRS rather than deposit it by EFT.

For amounts not properly or timely deposited, the penalty rates are as follows.

Penalty Charged for... 2% Deposits made 1 to 5 days late. 5% Deposits made 6 to 15 days late. 10% Deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due. 10% Amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return. But see Payment with return , earlier in this section, for exceptions. 15% Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.

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

Special rule for former Form 944 filers.

If you filed Form 944 for the prior year and file Forms 941 for the current year, the FTD penalty won’t apply to a late deposit of employment taxes for January of the current year if the taxes are deposited in full by March 15 of the current year.

Order in which deposits are applied.

Deposits are generally applied to the most recent tax liability within the quarter. If you receive an FTD 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 Revenue Procedure 2001-58. You can find Revenue Procedure 2001-58 on page 579 of Internal Revenue Bulletin 2001-50 at IRS.gov/pub/irs-irbs/irb01-50.pdf .

Example.

Cedar, Inc., is required to make a deposit of $1,000 on April 15 and $1,500 on May 15. It doesn’t make the deposit on April 15. On May 15, Cedar, Inc., deposits $2,000. Under the deposits rule, which applies deposits to the most recent tax liability, $1,500 of the deposit is applied to the May 15 deposit and the remaining $500 is applied to the April deposit. Accordingly, $500 of the April 15 liability remains undeposited. The penalty on this underdeposit will apply as explained earlier.

Trust fund recovery penalty.

If federal income, social security, or Medicare tax that must be withheld (that is, trust fund taxes) aren’t withheld or aren’t deposited or paid to the U.S. Treasury, the trust fund recovery penalty may apply. The penalty is 100% of the unpaid trust fund tax. If these unpaid taxes can’t be immediately collected from the employer or business, the trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so. The trust fund recovery penalty won’t apply to any amount of trust fund taxes an employer holds back in anticipation of any credits they are entitled to.

A responsible person can be an officer or employee of a corporation, a partner or employee of a partnership, an accountant, a volunteer director/trustee, or an employee of a sole proprietorship, or any other person or entity that is responsible for collecting, accounting for, or paying over trust fund taxes. A responsible person may also include one who signs checks for the business or otherwise has authority to cause the spending of business funds.

Willfully means voluntarily, consciously, and intentionally. A responsible person acts willfully if the person knows the required actions of collecting, accounting for, or paying over trust fund taxes aren’t taking place, or recklessly disregards obvious and known risks to the government’s right to receive trust fund taxes.

Separate accounting when deposits aren’t made or withheld taxes aren’t paid.

Separate accounting may be required if you don’t pay over withheld employee social security, Medicare, or income tax; deposit required taxes; make required payments; or file tax returns. In this case, you would receive written notice from the IRS requiring you to deposit taxes into a special trust account for the U.S. Government. You may be charged with criminal penalties if you don’t comply with the special bank deposit requirements for the special trust account for the U.S. Government.

“Averaged” FTD penalty.

The IRS may assess an “averaged” FTD penalty of 2% to 10% if you’re a monthly schedule depositor and didn’t properly complete Form 941, line 16; Form 943, line 17; Form 944, line 13; or Form 945, line 7, when your tax liability shown on Form 941, line 12; Form 943, line 13; Form 944, line 9; or Form 945, line 3, equaled or exceeded $2,500.

The IRS may also assess an “averaged” FTD penalty of 2% to 10% if you’re a semiweekly schedule depositor and your tax liability shown on Form 941, line 12; Form 943, line 13; Form 944, line 9; or Form 945, line 3, equaled or exceeded $2,500 and you:

Completed Form 941, line 16, instead of Schedule B (Form 941); Form 943, line 17, instead of Form 943-A; Form 944, line 13, instead of Form 945-A; or Form 945, line 7, instead of Form 945-A;

Failed to attach a properly completed Schedule B (Form 941), Form 943-A, or Form 945-A, as applicable; or

Improperly completed Schedule B (Form 941), Form 943-A, or Form 945-A by, for example, entering tax deposits instead of tax liabilities in the numbered spaces.

The FTD penalty is figured by distributing your total tax liability shown on Form 941, line 12; Form 943, line 13; Form 944, line 9; or Form 945, line 3, equally throughout the tax period. Then we apply your deposits and payments to the averaged liabilities in the date order we received your deposits. We figure the penalty on any tax not deposited, deposited late, or not deposited in the correct amounts. Your deposits and payments may not be counted as timely because the actual dates of your tax liabilities can’t be accurately determined.

You can avoid an “averaged” FTD penalty by reviewing your return before you file it. Follow these steps before submitting your Form 941, Form 943, Form 944, or Form 945.

If you’re a monthly schedule depositor, report your tax liabilities (not your deposits) in the monthly entry spaces on Form 941, line 16; Form 943, line 17; Form 944, line 13; or Form 945, line 7.

If you’re a semiweekly schedule depositor, report your tax liabilities (not your deposits) on Schedule B (Form 941), Form 943-A, or Form 945-A, as applicable, on the lines that represent the dates your employees were paid.

Verify that your total liability shown on Form 941, line 16, or the bottom of Schedule B (Form 941) equals your tax liability shown on Form 941, line 12.

Verify that your total liability shown on Form 943, line 17, or Form 943-A, line M, equals your tax liability shown on Form 943, line 13.

Verify that your total liability shown on Form 944, line 13, or Form 945-A, line M, equals your tax liability shown on Form 944, line 9.

Verify that your total liability shown on Form 945, line 7, or Form 945-A, line M, equals your tax liability shown on Form 945, line 3.

Don’t show negative amounts on Form 941, line 16, or Schedule B (Form 941); Form 943, line 17, or Form 943-A; Form 944, line 13, or Form 945-A; or Form 945, line 7, or Form 945-A.

For prior-period errors, don’t adjust your tax liabilities reported on Form 941, line 16, or Schedule B (Form 941); Form 943, line 17, or Form 943-A; Form 944, line 13, or Form 945-A; or Form 945, line 7, or Form 945-A. Instead, file an adjusted return (Form 941-X, 943-X, 944-X, or 945-X) if you’re also adjusting your tax liability. If you’re only adjusting your deposits in response to an FTD penalty notice, see the Instructions for Schedule B (Form 941), the Instructions for Form 943-A (for Form 943), or the Instructions for Form 945-A (for Forms 944 and 945).