How Payroll Tax Penalties are Calculated

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How Payroll Tax Penalties are Calculated by The Payroll Company 505-944-0105

The payroll tax penalty is calculated when you multiply the amount of the late payment by a payroll tax penalty percent. This percent depends on the number of days late as clearly visible from the following table.


1-5                |     2%

6-15              |     5%

Above 15      |   10%

How the Payroll Tax Penalty is calculated by the IRS?

When the payments are not assigned in agreement with the payroll liabilities by the employer then the penalties are calculated by the IRS for the quarter where the payroll tax payments are applied earliest to the payroll tax liabilities. This is a realistic practice but it has one drawback that if the initial payment is made late then as a consequence, other payroll deposits that are paid on time also become late.

To take an example, let’s consider the following situation:

It is mandatory for the employer to quarterly pay the payroll taxes. This comes to 3 obligatory payroll tax deposits per quarter. The first monthly payroll tax deposit was low paid and the remaining two monthly deposits were timely paid. This mistake was identified by the time when the payroll tax return form 941, was filed.

A payroll tax penalty notice from the IRS is sent to the employer. In this practice, when the payments applied by the IRS to payroll tax liabilities cause all the 3 deposits to become late and is dependent on payroll tax penalty. After that, the IRS applied some of payment 2 to unpaid liability 1. As a result, liability 2 becomes underpaid. Afterwards, some of payment 3 was applied by IRS to the unpaid portion of liability 2. This clearly shows the decline in payroll penalties. Although the IRS considers this to be unjust however, this issue can be rectified by properly using IRC §6656(e) on time. When the IRC §6656(e) is used in the right way and only 1 deposit gets late but not all of the 3 then it becomes notable.

Why there is need to reduce the payroll penalty?

Now the IRS is able to accept the employer’s selection of how the payments are applied to payroll accountabilities. From the example stated above, if the payment that was made using Form 941 is applicable to 1st payroll liability then this means that only the first payroll tax deposit should have come up with a payroll tax penalty.

In Rev. Proc.99-10, the IRS demonstrates with the help of an example. According to this example, the IRS notice states a payroll tax penalty of $500. When the employer selects how the payments are to be applied then there is a decrease in the penalty to $200. To further determine the details, have a look at IRC §6656(e) and Rev. Proc. 99-10 and read them carefully.

This appears very simple and precise no that’s wrong! It is simple only when there is one low-paid payroll tax deposit in every quarter. In case of more than one underpaid payroll tax deposits, every quarter then is there any ideal order for applying the payroll deposits to payroll liabilities? In case of 7 payments every quarter then you can arrange these payments into 5,040 ways. In case of 8 payments, you can arrange these payments in 40,320 ways. Is it possible for an employer to come up with a minimum amount of payroll tax arrangement of payments?

If you are interested in helping out with this procedure then simply contact The Payroll Company by filling out the CONTACT US form on our website.

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