Guide to Resolving Late Payroll Tax Payments

Employers must pay taxes on their employees’ wages, so they need to withhold income tax come payday. Taxes should be paid on time and in full, but that may not happen if you fail to withhold taxes. If you fail to deposit taxes on time or fully pay your tax liability, then there may be consequences. Pay your FICA taxes and other tax obligations on time to avoid penalties, like the failure to deposit penalty or the trust fund recovery penalty. .

Key Takeaways: Resolving Payroll Tax Debt (2026)

  • ✔ Current Interest Rates: For Q2 2026 (April–June), the IRS interest rate on payroll tax underpayments is 6%, compounded daily.
  • ✔ Penalty Escalation: Failure to Deposit penalties jump from 2% to 10% if not resolved within 16 days of the due date.
  • ✔ Personal Liability: Under the Trust Fund Recovery Penalty, the IRS can hold business owners personally liable for unpaid FICA taxes, regardless of corporate structure.
  • ✔ 2026 Law Changes: The One Big Beautiful Bill (2025) now requires specific overtime and tip reporting on Form 941 to qualify for new tax exemptions.
  • ✔ ERC Scrutiny: The IRS continues to prioritize ERC audits for 2026, with aggressive enforcement against improper pandemic-era credit claims.
If you always deposit taxes on time, there shouldn’t be an issue. If you don’t know where to start, consider enlisting the assistance of an experienced small business tax attorney.

What Are Payroll Taxes?

You must pay payroll and FICA taxes on employee wages, salaries, and tips. Payroll taxes typically don’t apply to independent contractors. Form 941 is used to report these payroll taxes to the government, and the taxes are then paid to the government by the employer who has filled out Form 941. If you need help filling out Form 941, then you should contact a professional. When an employer makes payroll tax deposits on time, there should be no issues. Employers should always stay on top of taxes and tax calculations when paying their employees and their other business taxes. If you don’t deposit payroll taxes when they’re due, then there may be unpaid payroll tax penalties incurred.

What Are Payroll Taxes Used for?

Payroll taxes are generally used to pay for government spending. Payroll tax may be used for Social Security and Medicare and funding various government programs. They may also be used to pay federal unemployment tax or state unemployment taxes so unemployed people can receive unemployment payments.

What’s the Difference Between Federal Income Tax and Employment Taxes?

The IRS charges both employers and employees taxes. Federal income taxes are paid by employees based on their income. Employees should withhold income taxes from their spending budgets so they can pay income tax on time. Income tax is used to fund education, transportation, and other public services. Employment taxes are paid by employees using funds withheld from employee wages. These taxes may cover unemployment tax, Social Security, and Medicare taxes. Employees must fill out Form 1040 to pay their taxes, while employers fill out Form 941. Employees must determine how much they owe for income taxes each year, while employers must know how much to withhold from employees’ paychecks. Payroll tax penalties apply if employment taxes aren’t paid. Penalties for unpaid income taxes apply for unpaid income tax.

When Are Payroll Taxes Paid?

Payroll taxes are generally paid quarterly, due by the last day of April, July, October, and January. You’ll fill out a business quarterly tax return, with January’s covering the last quarter of the previous year. Quarterly payroll tax returns generally help you keep on top of things. Withhold payroll taxes before the tax payments are due to make it easier for yourself. Filing your tax return late may lead to a failure to file penalty or a late filing penalty.

What Happens If I Pay My Taxes Late?

There are always consequences when a business fails to pay taxes on time. The IRS imposes a penalty on late payments. The cost of unpaid payroll tax penalties varies. You typically deposit penalty charges alongside the unpaid taxes when paying the IRS. Usually, there are only monetary penalties imposed. You’ll usually need to fill out a late filing form if you need to pay your taxes late. Late filing penalties may apply. Interest is also charged on penalties for unpaid tax debt, and it continues to be charged until you pay off your unpaid taxes in full. The maximum penalty won’t be above 25% of your unpaid taxes.

When Do I Start Paying Penalties?

If you have an unpaid deposit, then the late deposit penalty will typically apply straight away. For the first month of unpaid taxes, the IRS charges the greater of $10 or 5% of your unpaid taxes. An additional $10 or 5% is added for your second month if you have an unpaid balance. For the third month, it goes up to the greater of $10 or a further 10% of your unpaid tax balance. Other late deposit penalties may apply.

Other Penalties That May Apply

If you’re struggling to get your taxes paid on time, then you should consider getting tax advice to help you avoid the following penalties.

The Late Deposit Penalty

Usually, the late deposit penalty is 0.5% of your unpaid taxes. It’s paid monthly until your debt is settled.

The Failure to Deposit Penalty

The failure to deposit penalty is heftier than the late deposit penalty. It’s charged at 2% of your unpaid liability each month. If your payments with the penalty are six days late, then the penalty increases to 5%. If they’re 16 days late, then the penalty increases to 10%. It’s possible to apply for a penalty abatement, but there’s no guarantee that you’ll get it. You may consider hiring legal representation if you believe you’re entitled to having your penalties abated.

Trust Fund Recovery Penalty

The trust fund recovery penalty only applies to employers who knowingly or willfully don’t pay their payroll and FICA taxes. Much of the time, these unpaid taxes are placed into a bank account or trust that the employer owns and has access to. A hefty tax penalty will typically be issued if the IRS discovers you’re withholding tax payments. Tax laws are very strict, and deliberate refusal to pay payroll tax may result in a fine of up to $10,000. It may also be punishable by up to 5 years of prison time.

Asset Seizure

If you continue to ignore your payroll taxes, the IRS may seize your assets – depending on your business’s structure, they may be able to seize both business and personal assets. Typically, the agency must give you 30 days’ warning before seizing assets, but if you have a disqualified employment levy (applies if you had a hearing on unpaid payroll taxes in the last two years), the agency does not need to give you any advance warning. Instead, they may seize bank accounts or other assets and then send you a CP297A notice after the fact. 

What if I Can’t Afford To Pay Off My Unpaid Payroll Taxes?

It’s vital to pay payroll taxes as they make up Social Security and Medicare taxes, federal unemployment taxes, and other important taxes. However, If you’re struggling with paying payroll taxes, then there are ways you can break down the costs into more affordable chunks. this is often a better way for very small employers to pay off their tax liability. You’ll usually receive an IRS notice that payment is due on withheld employment taxes, and you should make an immediate payment if you can once you receive this IRS notice. However, if you can’t afford to pay in full, then you may be able to set up a payment plan and create a deposit schedule to pay instead. You must pay each deposit by the due date. If you don’t, then late deposit fees may apply to your future payments. If you need help negotiating an installment plan, then consider consulting a tax attorney.

What Are My Payment Plan Options?

If you have to pay off tax debt and tax penalty payments that you owe to the Internal Revenue Service, then there may be several plans available to you. Consulting a professional may help you set up a plan and negotiate with the IRS to come to an agreement that works for you. The IRS will generally expect you to file your payroll tax return on time going forward, and your attorney may help you factor future taxes into the installment plan you’re using to pay off your unpaid tax debts.

Short-Term Plans

A short-term plan sees your payroll tax debt paid off in around 180 days. There’s usually no fee for this plan, but penalties may still apply.

Long-Term Plan

If you won’t be able to pay your full liability within 180 days, then a longer-term installment agreement is generally set up. This way, you’ll pay off your remaining payroll tax debt in monthly payments that you can factor into your budget. The amount you’ll pay in each installment varies depending on your circumstances If you need help dealing with tax liability or setting up an installment plan to pay off late and unpaid payroll tax debt, then contact a business tax attorney from our firm today. We can also help you deal with employer tax audits, ERC audits, ERC audit penalties, and any other issues your business encounters with payroll taxes.