Improperly Filed Payroll Will Incur Penalties

Payroll is a highly regulated business obligation for employers that encompasses everything from personal information to federal government requirements. The consequences of improperly filed payroll can be incredibly damaging to your business. The IRS estimates approximately 40% of small to mid-size business in the United States improperly file their payroll yearly and subsequently pay penalties averaging $845. (See U.S. Small Business Administration) Limited time and expertise tends to make payroll fall by the wayside for many small businesses. Below are the penalties your business could incur if you don’t keep your payroll in tip top shape.


  • Failure to deposit (for form 941 and relating forms) – Payment of 2% will incur on filing 1-5 days late, 5% for 6-15 days late, 10% or more for more than 16 days late or within 10 days of first notice from IRS. The maximum penalty that an organization can incur is 15%.
  • Trust Fund Recovery Penalty – Refers to when an organization fails to collect taxes, account for or pay payroll taxes on time, or willfully evade taxes. The IRS states, “If income, social security, or Medicare taxes that must be withheld are not withheld or are not paid, you [as a responsible party] may be personally liable for the trust fund recovery penalty.” The responsible party of a business is defined by the IRS as the, “principle officer, general partner, grantor, owner, or trustor.” This entity is required to pay 100% of the unpaid tax, as well as additional penalties that may incur from the due date.
  • Failure to file penalty (for form 941 and relating forms) – With the return, 5% of the unpaid tax is due for each whole or part of the month that the return was not filed for.
  • Failure to prepare W-2 forms – A $50 penalty will be incurred if an organization fails to prepare W-2 forms by the end of January, for the previous year. This penalty will apply to each statement incorrectly prepared.


For more information see the IRS Publication 15: Employer’s Tax Guide.


The Bottom Line
Do not try to handle payroll on your own


As you can see, dealing with the IRS can be cumbersome. Lift the burden and outsource payroll to a professional employer organization (PEO). The exception to the rule is if your organization is an accounting agency or has a well-structured accounting department.


In essence, payroll is an essential business function and can be a daunting task, especially for small business owners. Possessing the knowledge and enrolling assistance will help ensure that your organization’s payroll will run smoothly and you will avoid costly penalties. Contact StaffScapes, a PEO service if you are interested in help with your payroll.