Virginia Payroll Tax Penalties & Interest
Checklist
Introduction
Virginia employers are required to withhold State Income Tax from employee wages and remit those payroll taxes to the Virginia Department of Taxation according to assigned schedules under Virginia law. These withheld amounts are trust funds and must be handled separately from business assets.
When tax returns or payments are late, incomplete, or unpaid, Virginia may assess penalties and interest. Understanding how these charges arise helps Virginia employers address tax delinquencies and limit collection efforts.
What This Notice Means
A penalty and interest notice means Virginia tax believes income tax withheld from employee wages was not filed or paid by the required deadline for the applicable taxable year. The notice reflects an assessed tax liability, including penalties and interest that accrue until resolved.
Notices may involve payroll tax filings, such as Form VA-5 or related tax forms, and may apply to quarterly or monthly filing schedules. Identifying the exact period and form involved is essential for accurate resolution.
Why the State Sent This Notice
The Department of Taxation issues these notices when tax withholdings are late, underpaid, or missing, in accordance with Virginia Payroll Regulations and the enforcement authority granted by the Virginia General Assembly. Penalties support voluntary compliance and timely tax payment.
Interest is imposed to compensate the Commonwealth for delayed use of funds and is calculated under Virginia rules rather than federal interest rates under the Internal Revenue
Code. These rules apply regardless of business size or industry.
What Happens If You Ignore This Notice
Unresolved notices can lead to collection procedures that may include liens, wage-related enforcement, or bank-related actions affecting business assets. Interest rates continue to apply, increasing the total tax liability over time.
Continued nonresponse may also trigger audit adjustments, referral to collections, or escalation under Virginia law. Ignoring payroll tax notices increases financial exposure and operational disruption for Virginia employers.
Checklist: What to Do After Receiving This Notice
Step 1: Review the notice details carefully
Confirm the tax period, tax returns referenced, and total balance due, including penalty and interest. Note any deadlines listed and identify whether late filing, late payment, or underpayment is cited.
Step 2: Verify filing frequency and due dates
Confirm whether the account was assigned to a monthly, quarterly return, or other payroll tax schedules. Compare due dates to actual filing and payment dates to identify discrepancies.
Step 3: Gather payroll and payment records
Collect payroll registers, Form W-2 records, Form VA-5 filings, and proof of tax payment, such as electronic filing confirmations. Include bank statements or ACH records showing cleared payments.
Step 4: Recalculate the tax liability independently
Reconstruct each period by listing tax withheld, payments made, and the remaining balance.
This helps identify posting errors, partial payments, or misapplied Voucher numbers.
Step 5: Confirm interest and penalty calculations
Review how the penalty and interest were applied, noting that interest accrues daily using
Virginia’s simple interest method. Verify whether the extension penalty or the late payment penalty applies.
Step 6: Contact the Virginia tax using the notice contact information
Call the Virginia Department of Taxation with notice numbers and supporting documents available. Ask which filings or payments are missing and how payments were applied.
Step 7: Determine eligibility for penalty relief
Evaluate whether reasonable cause exists, such as system failures or documented hardship.
Prepare supporting documentation if requesting consideration of a waiver.
Step 8: Assess payment arrangements if full payment is not possible
Ask about payment arrangements or installment options available for payroll tax balances.
Confirm whether interest continues during payment plans.
Step 9: Submit corrections or requests properly
Use the submission method specified on the notice and retain proof of submission. Follow up if confirmation is not received within a reasonable processing timeframe.
- State enforcement notices and responses
- Sales tax audits, assessments, and collections
- Payroll & trust fund tax enforcement issues
- Penalty and interest reduction options
- Payment plans and state tax relief eligibility
- Representation before state tax agencies
Step 10: Monitor account status until resolved
Check that payments post correctly and balances update. Retain records under Virginia Payroll
Record Retention Rules for future reference.
Common Mistakes to Avoid
Many Virginia employers delay filing tax returns when unable to make a full tax payment, unnecessarily increasing penalties. Filing on time while arranging payment reduces exposure to civil penalties.
Another frequent mistake is assuming payroll providers have resolved issues without verifying that payments have been cleared. Failure to keep confirmations complicates disputes during audits or collection procedures.
Frequently Asked Questions
Does interest stop after partial payments are made?
Interest accrues on the remaining tax liability until paid in full. Partial payments reduce principal but do not stop interest accrual.
Are payroll tax penalties different from other State Taxes?
Payroll tax penalties are often stricter because income tax withholding is treated as a trust fund.
Virginia law applies heightened enforcement to employment taxes.
Can the Virginia tax waive penalties?
Penalty relief may be available for reasonable cause, but it is not automatic. Documentation must support the request in accordance with the Department of Taxation's standards.
Does filing electronically reduce penalties?
Electronic filing does not eliminate penalties, but it helps prove timely submission. It also reduces posting delays and documentation disputes.
How long should payroll tax records be retained?
Virginia Payroll Record Retention Rules generally require records to be retained for at least 3 years after filing or payment. Longer retention is recommended for audits.
Closing
Virginia Income Tax Withholding compliance requires timely filing, accurate tax payment, and careful recordkeeping. Penalties and interest can grow quickly when notices are ignored or misunderstood.
Employers who review notices promptly, verify tax liability, and communicate with the Virginia tax place themselves in the strongest position for resolution. Ongoing compliance protects businesses from escalating enforcement and unnecessary financial strain.
Facing State Enforcement Action?
If you’ve received a notice related to sales tax or payroll tax enforcement, and aren’t sure how to respond, our team can help you understand your options and next steps.
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