Failure-to-Deposit Penalty

When an employer withholds income tax and Social Security and Medicare tax from paychecks, it must send that money to the IRS on a fixed schedule, called a deposit. The failure-to-deposit penalty applies when a deposit is late, too small or made the wrong way. It is a tiered penalty that grows the longer the deposit is overdue, and it is one of the most common payroll penalties. This page explains the tiers, the deposit rules that decide when a deposit is late, and how to avoid or reduce the penalty.

When a deposit is late

Whether a deposit is due depends on your deposit schedule, which the IRS sets from the taxes you reported in a lookback period. For the 2026 Form 941 schedule, the lookback period runs from July 1, 2024 through June 30, 2025. A business that reported $50,000 or less in that period is a monthly depositor. A business that reported more than $50,000 is a semiweekly depositor.

• Monthly: deposit taxes from payments made during a month by the 15th of the following month.
• Semiweekly: for paydays on Wednesday, Thursday or Friday, deposit by the following Wednesday. For paydays on Saturday through Tuesday, deposit by the following Friday.
• $100,000 next-day rule: if you accumulate $100,000 or more in taxes on any day, deposit by the next business day. A monthly depositor who reaches this level becomes a semiweekly depositor.

Small employers with a quarterly liability under $2,500 may be able to pay with the return instead of depositing. Our guide to federal payroll tax deposits explains the schedules in more depth, and payroll deadlines lists the dates.

The penalty tiers

The penalty also applies when a deposit is short or made the wrong way. Pub. 15 notes that the 10% tier covers, for example, amounts paid directly to the IRS or with a return when a deposit was required, subject to some exceptions.

Example (hypothetical). A monthly depositor owes a $10,000 deposit on March 15. If it is deposited on March 19, four days late, the penalty is 2%, or $200. If it is deposited on March 28, thirteen days late, the penalty is 5%, or $500. If it is not deposited until April 20, more than 15 days late, the penalty is 10%, or $1,000, and that replaces the lower tiers. If the amount is still unpaid more than 10 days after the first notice, the rate becomes 15%, or $1,500, on whatever remains unpaid.

The small-shortfall rule and how deposits are applied

Pub. 15 says no penalty applies to a shortfall that does not exceed the greater of $100 or 2% of the amount due, if it is made up by the shortfall makeup date. This is the accuracy-of-deposits rule.

The IRS applies deposits to the most recent liability within the quarter. That default can create a penalty on an older liability even though the money arrived. You can designate how a deposit should be applied within 90 days of the penalty notice. Ask your payroll provider or a CPA to review the notice quickly, because that window is short.

How long it runs and what it costs beyond the penalty

The tiers are fixed percentages of the unpaid deposit, so the base penalty stays at 10% after 15 days until a notice moves it to 15%. Interest continues on the unpaid tax and on penalties until paid, and the failure-to-pay penalty can apply to any balance left unpaid after the quarterly return. For a business that keeps missing deposits, the larger risk is the trust fund recovery penalty, which can make owners and other responsible people personally liable. The deposit penalty itself is charged to the business.

How to avoid it

• Know your schedule. Confirm it each year when the lookback period changes.
• Make deposits electronically through the federal system well before the deadline to leave time for problems.
• Run payroll so tax is set aside on each pay date, not at month end.
• Check your payroll provider's reports against what the IRS shows. A provider's error can still become your penalty.
• If you cannot deposit the full amount, deposit what you can. The penalty is based on the unpaid portion.

Asking for relief

The IRS may reduce or remove the penalty for reasonable cause shown in good faith. First-time abatement covers failure-to-deposit penalties, and the IRS describes an automatic exemption for qualifying filers with a clean three-year compliance history. For businesses, the deposit penalty must also not have been waived four or more times in the prior three years. See first-time penalty abatement. Call the number on the notice, or write a signed letter with supporting documents. If you had no bank account when a deposit was due, the IRS gives special documentation instructions on its penalty page.

How we can help

We can compare the deposits you made with the IRS record, find mismatches in how deposits were applied, and prepare a relief request. If you run payroll in-house, we can set up a deposit calendar and review controls so deposits are not missed. This is also available as part of our payroll services. We cannot promise relief, but a correct application of deposits can reduce what is owed.

You can also read our payroll tax penalties and relief guide or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.