Payroll penalties are some of the easiest costs to avoid and the most expensive to pay. A late deposit, a forgotten form or badly paid overtime can cost you thousands of dollars.
This guide explains the deadlines, the penalties and the calendar of forms in plain words. It is general information, not tax or legal advice.
In short
- Most small businesses deposit payroll taxes every month; others, twice a week.
- If you deposit late, the IRS charges 2% to 15% of the amount, plus interest.
- File the 941 every quarter, the 940 every year and the W-2s by January 31.
- In California, overtime is paid at time and a half after 8 hours a day or 40 hours a week.
- Intentionally misclassifying an employee as a 1099 worker can cost $5,000 to $25,000 per violation.
Deadlines to deposit payroll taxes
You withhold income tax, Social Security and Medicare from your employees. Those amounts, plus your share of Social Security and Medicare, are deposited with the IRS. These are the payroll taxes that cause the most penalties.
Your calendar depends on how much you reported in the lookback period. It is a past period the IRS uses to put you on a monthly or semiweekly schedule. IRS Topic 757 explains it.
| If in the reference period you reported | Deposit schedule |
|---|---|
| $50,000 or less | Monthly: no later than the 15th of the following month |
| Over $50,000 | Semiweekly: Wednesday or Friday, depending on payday |
| $100,000 or more accumulated in one day | Deposit by the next business day |
The IRS tells you each year which schedule applies to you. Confirm it in Publication 15 and on the Depositing and reporting employment taxes page.
If your business grows or you hire more crews, your schedule can change from monthly to biweekly. Check this every year, not only when you set up payroll.
Payroll penalties for late deposits
The IRS charges a penalty for depositing late, called the failure to deposit penalty. It is a percentage of the amount you did not deposit on time. It grows with the days late, as explained in IRS – Failure to deposit penalty.
| Delay | Penalty |
|---|---|
| 1 to 5 days | 2% of the amount not deposited |
| 6 to 15 days | 5% |
| 16 days or more | 10% |
| More than 10 days after the first IRS notice | 15% |
Example with made-up numbers to illustrate: you had to deposit $6,000 on May 15 and you did it on May 28. That is 13 days late. The penalty is 5%, or $300, plus interest.
Those penalties add to the interest and grow every day. That is why it makes sense to make the deposit first and pay for material later.
Payroll form calendar
Besides depositing, you must file forms. Form 941 is the quarterly report of federal withholding and taxes. Forgetting one also leads to penalties, so put them all on your calendar.
| Form | Agency | How often | What for |
|---|---|---|---|
| 941 | IRS | Quarterly | Federal withholding and taxes |
| 940 | IRS | Annual | Federal unemployment (FUTA) |
| W-2 and W-3 | Employees and SSA | By January 31 | Income and withholdings for the year |
| DE 9 and DE 9C | EDD | Quarterly | California taxes and wages per employee |
When you hire someone, you must also file the DE 34 with the EDD within 20 days of the first day of work. It is the new employee report.
Overtime in California
California has stricter rules than federal law. See the Fair Labor Standards Act (FLSA) for the federal rule and the DIR overtime FAQ for California's. These are the overtime rules in California:
- Time and a half after 8 hours in a day or 40 in a week.
- Time and a half for the first 8 hours on the seventh straight day of work in the week.
- Double time after 12 hours in a day.
- Double time after 8 hours on the seventh straight day.
Example with made-up numbers to illustrate: a helper earns $25 an hour and works 13 hours on a Tuesday. The chart above shows the pay, and the table sums it up.
| Hours | Rate | Payment |
|---|---|---|
| 8 regular | $25 | $200 |
| 4 at time and a half | $37.50 | $150 |
| 1 double-time | $50 | $50 |
| Total for the day | $400 |
A fixed salary does not make an employee exempt. To be exempt, they must meet several job-duty and minimum salary conditions. If they don’t meet them all, you have to pay overtime.
1099 vs. W-2
In California, the ABC test decides whether someone is a contractor or an employee. If the person works under your rules and with your tools, they are probably an employee (W-2). If they are an independent business that sends invoices, they may be a 1099.
Paying someone with a 1099 when he is an employee exposes you to back taxes. If the misclassification is willful, Labor Code 226.8 sets penalties of $5,000 to $15,000 per violation, and $10,000 to $25,000 if there is a pattern.
For the details of the test, read Employee or contractor? 5 signs and the ABC test.
Law changes and filings
Minimum wage, sick leave and notice laws change almost every year. Keep payroll records for at least 4 years. Every January, check the changes from the DIR and the EDD.
- Write down the deadlines for the year on one calendar.
- Keep copies of deposits, 941, DE 9 and DE 9C.
- When you hire, use the new-employee documents checklist.
If you keep your books up to date, finding these records is easier. Good bookkeeping for your construction business keeps track of what you paid and when. For payroll itself, rely on an independent payroll partner.
Common mistakes
- Using money withheld from employees to pay for materials.
- Forgetting the quarter's DE 9C.
- Paying overtime only after 40 hours a week.
- Paying cash off the payroll. Read paying employees in cash.
What to do now
- Confirm which deposit schedule applies to you.
- Put the 941, DE 9 and DE 9C dates on your calendar.
- Check how you calculate daily overtime.
- Open an account just for payroll taxes.
FAQ
When should I deposit payroll taxes?
It depends on how much you reported in the lookback period. Most small businesses deposit every month, no later than the 15th of the next month. Others deposit twice a week. The IRS assigns your schedule each year; confirm it in Publication 15 and Topic 757.
What happens if I deposit late?
The IRS charges a penalty of 2% to 15% of the amount not deposited, depending on the days late, plus interest. It is 2% for 1 to 5 days, 5% for 6 to 15 days and 10% from 16 days. If more than 10 days pass after the first notice, it goes up to 15%.
Does a salaried employee get overtime?
Yes, unless he meets all the conditions to be exempt. A fixed salary alone does not make him exempt. He must meet job-type and minimum-salary requirements. If one is missing, California requires time and a half after 8 hours a day or 40 a week.
When to talk to a professional
This article is a general guide. If your case involves a letter from the IRS, the FTB or the EDD, a lawsuit, an accident or a change in your business structure, talk to a lawyer, a tax preparer (CPA or enrolled agent) or the official agency. Every case is different.
How ODC helps you
At Oficina del Contratista we keep your bookkeeping up to date: we record your income and expenses, reconcile your accounts and explain your reports in Spanish. For taxes, payroll, insurance or legal matters, we connect you with independent partners; they provide those services, not ODC. See all services.
Want to avoid payroll fines? We connect you with a payroll partner and keep your books up to date. Message us on WhatsApp.
References
- IRS – Topic 757, Forms 941 and 944 deposit requirements — Monthly and semiweekly deposit schedules, lookback period and the $100,000 rule
- IRS – Failure to deposit penalty — 2%, 5%, 10% and 15% penalties for depositing late
- IRS – Depositing and reporting employment taxes — How to deposit and report employment taxes (Forms 941 and 940)
- DIR – Overtime FAQ — Overtime rules in California
- U.S. DOL – Fair Labor Standards Act — Federal overtime rule and exemptions
- California Labor Code 226.8 — Penalties for intentional misclassification
Runs Oficina del Contratista, a Spanish-language bookkeeping service for contractors. Has experience in management, sales and construction consulting.
Important notice: this article is educational and informational only; it is not legal or tax advice. It may contain errors or be out of date. Before making decisions, check it with a licensed expert or attorney.
