When it comes to payroll taxes, the IRS expects precision. Employers are required to withhold federal income tax, Social Security, and Medicare from employee wages. You must also deposit those funds on time, in the correct amount, and through the proper channels. When deposits are late or missed, the IRS imposes what’s called the Failure to Deposit (FTD) penalty.
How Much Is the FTD Penalty?
The FTD penalty increases with how late the deposit is. Here’s how the IRS calculates it:
| Days Late |
Penalty Rate (of unpaid deposit) |
| 1-5 days late |
2% |
| 6-15 days late |
5% |
| More than 15 days late |
10% |
| More than 10 days after the first IRS notice |
15% |
The penalty starts from the original due date of the deposit. Interest is also charged on unpaid deposits and on penalties until the whole amount is cleared.
FTD Penalty vs Trust Fund Recovery Penalty (TFRP)
Because payroll withholding taxes are considered trust fund taxes (you hold them in trust for the government), there’s a similar penalty that can also apply, the Trust Fund Recovery Penalty.
- FTD Penalty: Imposed when an employer fails to make required payroll tax deposits (withheld income tax, employee portion of Social Security & Medicare) on time, in the correct amount, or via the proper method.
- TFRP: Allows the IRS to hold individuals personally responsible for willful failure to collect, account for, or pay over trust fund taxes (the withheld taxes from employees).
An employer with unpaid or late payroll tax deposits might face an FTD penalty first. If the situation is serious enough, or if the person in charge was willful, the IRS may also assess the TFRP to hold someone personally responsible.
What You Can Do About the FTD as an Employer
If you find yourself facing FTD penalties, there are some paths to reduce or remove them:
- If you can show that some event outside your control made timely deposits impossible (natural disaster, serious illness, etc.), you may request abatement.
- If you have a good compliance history, the IRS might waive an FTD penalty once.
- Timely deposit of the owed amount after getting the notice might limit how large the penalty becomes.
IRS penalties are nothing to take lightly, especially as a business owner. At Gabaie & Associates, LLC, we can help you deal with FTD penalties, the TFRP, and other IRS issues you encounter. Call (410) 358-1500 or fill out our contact form to schedule a consultation.
