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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 Must be processed via EFTPS for most taxpayers.

Welcome to EFTPS.

EFTPS is a service offered free by the U.S. Department of the Treasury for people to pay federal taxes electronically.

Remember! EFTPS values your privacy and security and will never attempt to contact you via e-mail. If you ever receive an e-mail that claims to be from EFTPS or from a sender you do not recognize that mentions a payment made through EFTPS, forward the e-mail to phishing@irs.gov or call the Treasury Inspector General for Tax Administration at 1.800.366.4484.

Attention! As of January 1, 2011, many businesses will be required to make federal tax deposits electronically.

Your options include:
  • using this Web site or the voice response system.

    You must be enrolled in EFTPS to pay via either system. If you recently were pre-enrolled in EFTPS and cannot find your PIN, call 888.434.7338. Payments must be scheduled by 8 p.m. ET the day before the due date to be received timely.

  • asking your financial institution to initiate an ACH Credit payment on your behalf.

    This option requires an EFTPS enrollment, but your banking information is not part of that enrollment. Financial institutions are not required to initiate payments for you, and may charge you a fee if they offer this service. Check in advance for cutoff times, which may be earlier than if you make a payment yourself using EFTPS.

  • asking another trusted third party such as a tax professional or payroll service to make the payment for you.

  • in extraordinary circumstances, asking your financial institution to make a same-day tax wire payment for you.

    Financial institutions are not required to do this, and may charge you a fee. Check with your financial institution in advance for cutoff times. To download a worksheet for this purpose, go to the Help & Information tab above, then click on Downloads.

For general EFTPS Customer Service assistance, call 800.555.4477. If you have questions about the rule, search on "Tax Topics 757" at the IRS Web site or call the IRS at 800.830.5215.

WARNING!
You are using an Official United States Government System, which may be used only for authorized purposes. Unauthorized modification of any information stored on this system may result in criminal prosecution. The Government may monitor and audit the usage of this system, and all persons are hereby notified that the use of this system constitutes consent to such monitoring and auditing. Unauthorized attempts to upload information and/or change information on this web site are strictly prohibited and are subject to prosecution under the Computer Fraud and Abuse Act of 1986 and Title 18 U.S.C. Sec. 1001 and 1030.

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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Phone: (503) 459-1074
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