Not Paying Your 941 Employment Taxes? How Much Is the Penalty (and Interest)

When small business owners find themselves low on cash during payroll time, the first thought that comes to mind is forget paying yourself and if you’re really cash strapped, you can always pay your 941 employment taxes late right? Wrong.

Employment or 941 taxes are the dollars withheld for Federal income tax from employee’s paychecks, Social Security and Medicare taxes and the employer match of the SS and Medicare taxes. If you have employees, this is a tough nut to make each pay period, especially since the employer is required to match the SS and Medicare taxes.

I can compare this to being in a Catholic school as a youth where the nuns were at least 15 foot tall (and mean) and the priests—well they were so tall and out of reach, you just didn’t talk, look or think about them, unless you were waddling up the aisle during mass to gain the holy wafer.

The Internal Revenue Service seems far away and very tall indeed, so why not just forget about them? You can catch up. You can rob Peter and pay Paul (the IRS) in a week or two. You can skip them all together and just pay the next time. You have other things to pay. Your landlord is threatening to kick you out, the bank loan is one day away and yep, you pick the IRS 941 taxes to skip. This is a bad, bad move

Yes it’s true the IRS is a big institution but I guarantee you, they are not that big and do have offices in most large cities (capital cities). When your number comes up (lack of deposits showing), out comes a representative and then you’re really in trouble.

How do they even know? Well, those pesky 941 quarterly reports must be filed where all wages must be listed as well as deposits and you can fudge them I suppose, if prison greys are your thing. Once they’re filed and the IRS notices you haven’t made the required deposits, expect a knock at the door.

The screenshot above shows the four-tier penalty phase. This is actually from Part 20 of Chapter One from the Penalty Handbook. Everything produced out of the IRS is never short (notice the part 20). The screenshot is actually Part 20.1.4.7.1 or as the IRS likes to call it, the “Time Sensitive Four Tier Penalty System.”

If you click on the screenshot to enlarge, you’ll see right off that even being one to five days late will cost you money.  First off, I don’t know why they call this the “four tiers” because the penalties offered actually run from A through F. I love Letter F the best:

F. 15 percent (actually, a 5 percent addition to the 10 percent for late payment in (c) above) for all amounts still unpaid more than 10 days after the date of the first notice that the IRS sent asking for the tax due or the day on which the taxpayer received notice and demand for immediate payment, whichever is earlier. See IRM 20.1.4.14.4, Penalty Indicator Codes (PIC) (15 Percent Rate)

What? I would love to work for the IRS for just one day. Ever call the IRS? You’ll be on hold for a while and they do warn how long the hold may be and even a better time or day to call but when you do get a real live person, it’s always, “Mr. Smith, I.D. number 423786J2107987653218—and it’s that long too, that I.D. number. I would like to just once say, “Hey welcome to the IRS, my name is Jean and I’m here to help you. What are your concerns? Are you frightened? Did you make a teeny tiny mistake? I can help with that! Oh by the by, my I.D number is 423786J2107987653218.

Wouldn’t that be nicer than the cold Mr. Smith or Ms. Jones who answer? I think so!

In any event, missing these payments is serious so you simply can’t. Over the years when I’ve looked at businesses to buy, the first thing I ask them is how late they are on their 941 employment taxes. Over the past 17 years, I only found one out of five weren’t late. This shows you how easy it is for the average small biz owner to just skip these and try to catch up later.

The problem with this is once they catch you, they’ll of course demand all you owe, plus interest and penalties and of course—you don’t have a lump sum that large so your next step is to be prepared to meet face to face with an IRS agent in an attempt to set up a payment plan.

You can’t just call the IRS to set up a 941 tax payment plan. Nope, it doesn’t work that way. You will be asked to complete their Form 433-B or “Collection Information Statement for Business.” This is where the IRS delves deep into your business financials and you must also include written statements on why you couldn’t pay your 941 taxes. It’s not an easy process and your payment plan has to be approved so you better not fudge on Form 433-B.

Once you’re approved, your next step is to make a commitment to pay 941 taxes each pay period and don’t pay them late or skip them. You’ll also have a monthly nut to the IRS from past due taxes so in reality, you’re paying them a lot—especially when you don’t have a lot.

Don’t skip these. Even if you do have to be a few days late on rent, utilities or even the bank note, let these vendors know you’ll have the money on such and such a date and NEVER skip paying the IRS. They will find you, and if you think living in a rural area will protect you, it won’t.

I joke about the Mr. Smiths and Ms. Joneses of the IRS, but they really can help you before it gets too late you’re so far in debt you feel there is no way out but to close the doors and file business bankruptcy. Unfortunately, you can’t file bankruptcy on payroll taxes—you have to pay them, bankruptcy or not.

Use some common sense and plan ahead. If your payroll is normally around $10,000, add a couple thousand to that for any 941 taxes (state taxes too) to ensure you can cover the nut. It doesn’t take long for that four-tier (well actually A through F) tier to start adding up and if you get that far, you are indeed doomed.

You can read the entire penalty handbook from the IRS here.