Employers who fail to deposit their payroll and withholding taxes on time face penalties based on how late the deposits are made. Some of the employers made an honest mistake in calculating and underreporting their 941 tax liability deposits. These employers may want to know how much the 941 late payment penalty is so they can prepare accordingly—or they may want to know how much their accountant’s mistake is going to cost them.
Other employers are faced with choosing whether to make these deposits or pay other business debts. The IRS never forgets these tax liabilities, even if your company eventually closes business. On the other hand, staying on good terms with a third-party business vendor can be essential for your business as well. This leads many business owners and their accountants to determine the exact 941 late payment penalty the company is likely to incur.
You can learn about the formal IRS rules for these penalties from the recent IRS Publication 15: Employer’s Tax Guide (2017). With this in mind, Advanced Micro Solutions (AMS) wanted to provide our business clients with some basic information and resource links to help make these kinds of decisions and determinations as quickly and as accurately as possible. If you need an all-around system update, AMS Payroll ($129) is an excellent choice.
So, How Much is the 941 Late Payment Penalty?
The basic rates for a 941 late payment penalty are not especially difficult to understand or calculate. In Section 11 of Pub 15, the IRS provides the following table:
- 2% penalty on deposits made 1 to 5 days late.
- 5% penalty on deposits made 6 to 15 days late.
- 10% penalty on 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% penalty on amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return. (Note: In certain situations, it’s okay to pay small tax liability payments with your tax return. Again, see Section 11.)
- 15% penalty on amounts still unpaid more than 10 days after the date of the first applicable IRS notice.
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Different Types of 941 Late Payment Penalty Adjustments and Abatements
This timetable of late penalties might be easy to understand if that was all of it. The thing is there are a handful of situations in which these penalties can be modified. It’s also worth pointing out that these penalties only apply to late deposit payments, and that other penalties may apply for fraudulent or missing filings. But here’s a summary of common and clearly defined situations that can influence the size of these penalties.
- “Averaged” FTD Penalties: If you’re a monthly schedule depositor or if you’re a semiweekly schedule depositor that failed to provide a Schedule B, it may be impossible for the IRS to know exactly when the 2% and 10% penalty rates apply. In these situations, the IRS tends to split the difference by assessing “averaged” FTD penalties. This penalty is determined by “distributing your total tax liability shown on Form 941, line 12, equally throughout the tax period.” In a worst-case scenario, deposits and payments that should be counted as on-time are instead assessed a penalty because Form 941 and/or Schedule B weren’t prepared and filed accurately. More information on averaged FTD penalties can be found in Publication 15.
- Order of Deposits and Minimal Penalty: If you’ve received notice that a 941 late payment penalty has been assessed, you may have the funds to make your next employer tax liability deposit—or to pay off the previously outstanding balance and late penalty. In these cases, the IRS lets you designate how the deposits are applied so as to minimize the amount of the penalty and total amount due. There should be instructions on the penalty notice, but you can also find more information on designating deposits. See Revenue Procedure 2001-58 on page 579 of Internal Revenue Bulletin 2001-50.
- Reasonable Cause Penalty Abatement Letter: The IRS doesn’t assess any penalty if you have a reasonable cause for failing to pay and/or failing to file. Generally, this means like a natural disaster, death or dire medical illness, or some other unavoidable absence. In Cast Away, it’s unlikely that Tom Hanks’ character, Chuck Noland, faced any penalties for failure to file his tax returns while on a deserted island. The IRS notes that a lack of funds does not itself constitute a reasonable case, but that the reason for the lack of funds may be considered. Learn about all the rules and the types of documents you should consider including with the letter here.
- First-Time Penalty Abatement: For the most part, the first-time penalty abatement is exactly what it sounds like: A one-time “get-of-jail-for-free” card. There are certain criteria that include filing any necessary corrections and payments (or payment arrangements). You must also have a clean penalty history, though this doesn’t count “estimated tax” penalties or penalties which are older than 3 years old. It’s also worth pointing out the IRS created a special rule for former Form 944 filers that mimics the first-time penalty abatement: If you filed Form 944 in the prior year, the FTD penalty won’t apply for January employment taxes—so long as the taxes are deposited in full by March 15.
- Accuracy of Deposits Makeup Payment: There may be minor discrepancies between calculated and actual tax liabilities. Maybe you forgot to correct for the rounding errors that occur, formally known as fractions-of-cents adjustments, for example. Maybe some other accounting hiccup has created a slight underpayment in payroll deposits. The IRS has a mechanism in place to forgo penalties when these types of discrepancies create small deposit shortfalls. The short answer is that if the amount of the shortfall is less than $100 or 2% of the total amount to be deposited (whichever is greater), then you can make up the shortfall penalty-free by making up the difference by the shortfall makeup date. What’s the makeup date? It depends both on your status as a monthly vs. semiweekly depositor and the exact date on which the tax liability occurred. We recommend consulting Section 11 of Publication 15 for “Accuracy of Deposits Rule.”
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Software Support for Form 941 and Other Employer Filing Forms
Whether you’re trying to get rid of or minimize a late payment penalty, you need software support that can report updated information and process payments quickly, reliably, and cost-effectively. You’re not going to find a better answer than AMS Payroll and Forms Filer Plus when looking for software support for these federal and state employment forms.
If you’re looking into the 941 late payment penalty, you might be in need of some other 941-related support. We have a range of tools and resources to assist your search.
Correcting Form 941 and Quarterly Returns – We all need to correct Form 941 for one reason or another. Maye you experienced a disruption in your accounting services. Maybe you mistook Schedule H Form 1040 for Form 941. No matter the reason, we can help you out.
Software Support for Amended 941 Schedule B – Amended 941 Schedule B is one of the most common filing corrections in the entire IRS catalogue. Most of the time, accountants need to correct rounding errors, an annoying but nearly unavoidable mistake. That said, using an AMS software is a great way to both file your amendment and avoid future errors.
Small Business 941 Filing Software – Form 941 is an extraordinarily important form, but some small businesses transitioning into higher employee numbers might need some additional support. Investing in a 941 filing software is a great way to mitigate any growing pains.