Payroll Tax Deposit Requirements
When starting a new business and hiring employees, one very
important aspect to consider is payroll tax liability. A business'
payroll tax liability consists of not only the taxes required to be
withheld from employees' wages (Social Security tax, Medicare tax
and federal income tax) but also the employer's matching share of
Social Security and Medicare taxes. The business' liability is
reported quarterly on Form 941 or annually on Form 944 but payroll
tax deposits must be made according to deposit schedules.
For the majority of small businesses, there are two deposit
schedules - monthly or semiweekly - for making required Form 941 or
Form 944 deposits. The terms "monthly schedule depositor" and
"semiweekly schedule depositor" do not refer to how often employees
are paid. The terms only identify which set of rules a business must
follow when depositing Form 941 or 944 tax liabilities. A new
business or an existing business with an annual liability of $1,000
or less may qualify to file the annual Form 944. The IRS will notify
you early in the year if you qualify. In order to gain an
understanding of both the monthly and semiweekly deposit schedules,
each will be briefly discussed.
Monthly Deposit Schedule
Under the monthly deposit schedule, taxes on wages paid during a
calendar month must be deposited by the 15th day of the following
month. If the 15th day of the month falls on a day that is not a
banking day, the deposit will be considered timely made if it is
deposited by the close of the next banking day. Federal and state
bank holidays, Saturdays and Sundays are treated as nonbanking days.
An example would be if the payroll tax deposit was due on Sunday.
Sunday is a nonbanking day, so the deposit would be considered
timely made if posted on Monday by the bank's cutoff. Cutoff times
vary by bank; therefore, be sure to verify the cutoff time of the
bank to be used.
Semiweekly Deposit Schedule
Under the semiweekly deposit schedule, taxes on wages paid on
Wednesday, Thursday and/or Friday are required to be deposited by
the following Wednesday. Taxes on wages paid on Saturday, Sunday,
Monday and/or Tuesday are required to be deposited by the following
Friday. The deposit rules are based on the day wages are actually
paid, not when the employment tax liabilities are accrued.
Determination of Deposit Schedule
A business' deposit schedule for a calendar year is determined
annually from the total taxes reported on Form 944 or on Form 941 in
a four quarter lookback period beginning on July 1 of the prior year
and ending on June 30 of the current year. If a business reported a
tax liability of $50,000 or less in the lookback period, it must
follow the monthly depositor schedule: if more than $50,000 was
reported during the period, the semiweekly depositor schedule would
apply. For example, if for the period July 1, 2000 to June 30, 2001,
a business reported taxes of $45,000, then for the year 2002 the
business would follow the monthly depositor schedule. If the taxes
had been $55,000, the business would follow the semiweekly depositor
schedule.
Exceptions to the Deposit Schedules
One exception to the monthly and semiweekly deposit schedules
discussed above is the $100,000 next-day deposit rule which will
affect future deposit schedules. If the total accumulated tax
liability reaches $100,000 or more on any day during a deposit
period, a deposit must be made by the cutoff time of the next
banking day regardless of whether the business is on a monthly or
semiweekly deposit schedule. Should this situation be encountered,
contact your tax adviser or the Internal Revenue Service for
guidance.
The second exception to the monthly deposit rule: If you, as an
employer, accumulate a tax liability of less than $ 2,500 during a
quarter for Form 941 (during a calendar year for Form 943, Form 944,
Form 945, and Form CT-1), no monthly deposits are required if you
pay in full with a timely filed return. However, if you are unsure
that you will accumulate less than $ 2,500, deposit under the
appropriate deposit rules so that you will not be subject to the
failure-to-deposit penalties.
How to Deposit Taxes
Generally, income tax withheld and both the employee and employer
Social Security and Medicare taxes must be deposited by mailing or
taking a check, cash or money order to an authorized financial
institution following the deposit schedule discussed above or via
EFTPS (Electronic Federal Tax Payment System) found at
www.eftps.gov. However, some businesses are required to deposit
using electronic funds transfer (EFTPS). New businesses will be
eligible to make deposits with a financial institution and will be
notified by the Internal Revenue Service when required to change to
electronic funds transfer.
In order to make deposits at an authorized financial institution,
a business will need Form 8109, Federal Tax Deposit coupon (FTD).
For a new employer, the IRS will send a Federal Tax Deposit coupon
book five to six weeks after the business has been assigned a
federal employer identification number (EIN). The IRS will track the
number of coupons used and will automatically furnish additional
coupons. The FTD coupons are used to deposit various types of
federal taxes. The coupons have entry boxes for filling in the
amount of the deposit, the type of tax and the tax period for which
the deposit is being made.
It is very important to clearly and correctly mark the type of
tax and tax period on each FTD coupon. The information on the coupon
is used by the IRS to apply deposits to your account. The check or
money order issued in payment of taxes should be made payable to the
financial institution at which the deposit is being made. Income
taxes withheld, Social Security and Medicare taxes are reported
quarterly on Form 941; therefore, any deposits made for these taxes
must be entered as a 941 deposit on the FTD coupon, along with
noting on the coupon the quarter to which the deposit is to be
applied. Form 941 taxes follow calendar quarters regardless of a
business' fiscal year.
Deposits Without EIN or FTD Coupon
If the business needs to make a deposit before receiving its EIN,
the deposit must be made by mail and mailed directly to the Internal
Revenue Service Center . Do not make the deposit at a financial
institution. Make the check or money order payable to the "United
States Treasury" and show on it the business name, address, the type
of tax, the period covered and the date the EIN was applied for. An
explanation will need to be sent with the payment.
If an EIN has been obtained but the business' FTD coupons have
not been received, Form 8109-B can be used to make the deposit. Form
8109-B is a deposit coupon not printed with any identifying
information. Form 8109-B can be obtained by contacting the Internal
Revenue Service at
1-800/829-1040.
Conclusion
- Significant penalties may apply if required deposits are not
made in a timely manner. In order to avoid penalties, it is wise
to gain an understanding of the deposit rules outlined above. If
additional guidance is needed, contact your tax adviser or the
IRS at
-
1-800/829-1040.
More information can also be obtained from the IRS Web site at
www.irs.ustreas.gov.
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