Treasury Regulation 31.6302-1(e) states that no penalty applies if a deposit
has a shortfall of the greater of 2% of the deposit or $100. So, if a taxpayer
has a $10,000 liability, the 98% rule says there is no penalty if he pays $9,800
on the due date. Similarly if a taxpayer had a $1,000 liability, the $100
rule says there is no penalty if he pays $900.
For semiweekly taxpayers, the unpaid 2% or $100 must be paid on or the first Wednesday
or Friday on or after the 15th of the month following the month in which the deposit
was due. For monthly taxpayers, the unpaid amount is due by the date the return
is due.
In addition to simple designation of deposits, PayrollPenalty takes the amount
of any liability and splits that liability into a 98% amount and a safe harbor amount.
We pay the 98% amount even if we could have paid the entire 100%. In this
way we save the 2% amount to deal with any deposit obligations that may occur before
the 2% catch up date.
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