Form 941 and Payroll Tax Penalties: A Guide for Small Business Owners
Payroll taxes are the IRS problem that grows fastest for small businesses. The penalties stack up quickly, and some can follow you personally. Here's how Form 941 works and how to stay out of trouble.
By the Enrolled Agents and CPAs at A&W Tax Services · Updated
What Form 941 reports
Every quarter, employers file Form 941 to report wages paid, federal income tax withheld from employees, and both the employee and employer shares of Social Security and Medicare tax. It's due by the last day of the month after each quarter ends: April 30, July 31, October 31 and January 31. Very small employers may be approved to file Form 944 once a year instead.
Deposits are separate from the return
Filing Form 941 isn't the same as paying. Payroll taxes must be deposited electronically on a set schedule. Most new employers are monthly depositors, paying by the 15th of the following month. Employers that reported more than $50,000 of payroll tax in the IRS's lookback period deposit semiweekly, within a few days of each payday. Any business that piles up $100,000 or more in tax on a single day must deposit by the next business day.
The penalties
- Failure to deposit: 2% if 1 to 5 days late, 5% if 6 to 15 days late, 10% if more than 15 days late, and 15% if still unpaid 10 days after an IRS notice
- Failure to file Form 941: 5% of the unpaid tax for each month the return is late, up to 25%
- Failure to pay: an additional 0.5% a month on tax shown on the return but not paid
- Interest on all of it, charged daily
The trust fund recovery penalty
Income tax and the employee share of Social Security and Medicare are withheld from your employees' pay and held in trust for the government. If they aren't paid over, the IRS can assess the trust fund recovery penalty against any responsible person, such as an owner, officer or bookkeeper with authority to pay bills. The penalty equals 100% of the unpaid trust fund taxes and is assessed against that person individually. An LLC or corporation doesn't protect you from it.
Other payroll filings to keep up with
- Form 940 for federal unemployment (FUTA) tax, due January 31
- W-2s to employees and the Social Security Administration by January 31
- Quarterly Texas Workforce Commission unemployment tax reports
- 1099-NEC forms for independent contractors by January 31
Already behind?
Get current first. Make this quarter's deposits on time so the balance stops growing, then file any missing returns. An Enrolled Agent can request penalty relief, set up an installment agreement for the old balance and, where possible, resolve it before the IRS opens a trust fund recovery investigation.