Failure to Pay Using E-Pay Penalty — What Is It and How to Navigate It

In 2023, a significant number of S corporations and LLCs taxed as S corporations may encounter the electronic payment (e-pay) mandate for the first time. This situation arises from elective tax payments made in 2022 for the 2021 tax year. California enforces a 10% penalty on corporations (statutory Corporations and LLCs taxed as Corporations) that are obliged to pay their taxes electronically but fail to comply. It's important to note that electronic payment requirements, triggered by passthrough entity tax (PTET) payments, apply to the entities themselves and not to their individual owners.

For entities that have made substantial elective tax payments, the penalties can be considerable. For example, if a taxpayer required to adhere to the e-pay mandate pays a $250,000 elective tax payment by check, they could face a $25,000 penalty. It is essential for taxpayers to understand the repercussions of not following the e-pay mandate.

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Even if an entity falls under this mandate in future tax periods, all subsequent payments to the Franchise Tax Board (FTB) must be made electronically to avoid the 10% penalty.

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Last year (in calendar year 2022), the FTB might have excused payments made by check due to confusion over whether these were subject to the e-pay mandate. However, it is less likely that such leniency will be extended in the future so we advise you ask us or your existing tax professional on how to proceed when making payments exceeding the threshold of $20,000 for a Corporation, LLC, or as an Individual taxpayer.

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Who Needs to Follow the Mandate?

Any corporation with a single estimated tax or extension payment exceeding $20,000, or a total tax liability over $80,000, must make all future payments electronically. Partnerships and LLCs taxed as partnerships are exempt since the mandate currently applies only to individuals and corporations.

S corporations already under the e-pay mandate must make their elective tax payments electronically. For those not previously under this mandate, a tax return showing more than $80,000 in elective tax liability will trigger the mandate in future years. Note that since the elective tax is not an estimated tax, payments over $20,000 will not activate the mandate. However, the triggering payment need not be made electronically.

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Payment Methods

Businesses can usually make electronic funds transfer (EFT) payments via the FTB’s Web Pay or by credit card. Elective passthrough entity taxes, real estate, resident/nonresident, or backup withholding cannot be paid by credit card. Tax return balances can be paid through electronic funds withdrawal (EFW), either with the e-filed return or as a separate payment after e-filing. Taxpayers can also make standalone requests for elective tax, extension, and estimated tax payments using tax preparation software.

Taxpayers may request a waiver from EFT requirements by submitting Form FTB 3816. Waivers are granted if the amounts paid exceed the threshold but are not representative of the taxpayer’s actual tax liability, or if the taxpayer did not meet the threshold in the prior year — generally it's best to pause, ask us or your existing tax professional how to proceed, and do it the correct way to avoid having to submit a FTB 3816 waiver request — that should be a last resort.

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Contact our firm if you have any questions regarding the e-pay mandate.

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