Payroll Articles
Payroll Tax Deposit Rules
Online payroll service, Futa tax and federal income tax withheld are discussed in the payroll articles below.
Depositing Taxes
In general, you must deposit federal income tax withheld and both the employer and Employee Social Security and Medicare taxes plus or minus any prior period adjustments to your tax liability (minus any advance EICpayments) by mailing or delivering a check, money order, or cash to a financial institution that is an authorized depositary for federal taxes. However, some taxpayers are required to deposit using the Electronic Federal Tax Payment System (EFTPS).
Payment with return
You may make a payment with Form 941 instead of depositing if one of the following applies.
- You report less than a $2,500 tax liability for the quarter on line 10 of Form 941, and you pay in full with a timely filed return. (However, if you are unsure that you will report less than $2,500, deposit under the appropriate rules so that you will not be subject to failure to deposit penalties.)
- You are a monthly schedule depositor (defined below) and make a payment in accordance with the Accuracy of Deposits Rule discussed on page 21. This payment may be $2,500 or more.
Separate deposit requirements for nonpayroll (Form 945) tax liabilities.
Separate deposits are required for nonpayroll and payroll income tax withholding. Do not combine deposits for Forms 941 and 945 tax liabilities. Generally, the deposit rules for nonpayroll liabilities are the same as discussed below, except that the rules apply to an annual rather than a quarterly return period. Thus, the $2,500 threshold for the deposit requirement discussed above applies to Form 945 on an annual basis. See the separate Instructions for Form 945 for more information.
When to Deposit
There are two deposit schedules "monthly" or "semiweekly" for determining when you deposit Social Security, Medicare, and withheld income taxes. These schedules tell you when a deposit is due after a tax liability arise (for example, when you have a payday). Prior to the beginning of each calendar year, you must determine which of the two deposit schedules that you are required to use. The deposit schedule that you must use is based on the total tax liability that you reported on Form 941 during a four-quarter lookback period discussed below. Your deposit schedule is not determined by how often you pay your Employees or make deposits. These rules do not apply to federal unemployment (FUTA) tax.
Lookback period
Your deposit schedule for a calendar year is determined from the total taxes (that is, not reduced by any advanceEIC payments) reported on line 8 of your Forms 941 in a four-quarter lookback period. (Refer to line 11 on pre-2005 versions of Form 941.) The lookback period begins July 1 and ends June 30 If you reported $50,000 or less of taxes for the lookback period, you are a monthly schedule depositor; if you reported more than $50,000, you are a semiweekly schedule depositor.
Adjustments and the lookback rule
Determine your tax liability for the four quarters in the lookback period based on the tax liability as reported on your Form 941. If you made adjustments to correct errors on previously filed Forms 941, these adjustments do not affect the amount of tax liability for purposes of the lookback rule.
If you report adjustments on your current Form 941 to correct errors on prior Forms 941, include these adjustments as part of your tax liability for the current quarter and adjust your deposits accordingly. If you filed Form 843 to claim a refund for a prior period overpayment, your tax liability does not change for either the prior period or the current period for purposes of the lookback rule.
Example:
An employer originally reported a tax liability of $45,000 for the four quarters in the lookback period ending June 30, 2004. The employer discovered during January 2005 that the tax during one of the lookback period quarters was understated by $10,000 and corrected this error with an adjustment on the 2005 first quarter return. This employer is a monthly schedule depositor for 2005 because the lookback period tax liabilities are based on the amounts originally reported, and they were $50,000 or less. The $10,000 adjustment is part of the 2005 first quarter tax liability.
Deposit period. The term deposit period refers to the period during which tax liabilities are accumulated for each required deposit due date. For monthly schedule depositors, the deposit period is a calendar month. The deposit periods for semiweekly schedule depositors are Wednesday through Friday and Saturday through Tuesday.
Monthly Deposit Schedule
You are a monthly schedule depositor for a calendar year if the total taxes on line 8 of Form 941 for the four quarters in your lookback period were $50,000 or less. (Refer to line 11 on pre-2005 versions of Form 941.) Under the monthly deposit schedule, deposit Form 941 taxes on payments made during a month by the 15th day of the following month. Monthly schedule depositors should not file Form 941 on a monthly basis. Also, do not file Form 941-M, Employer's Monthly Federal Tax Return, unless you are instructed to do so by an IRS representative. New employers, during the first calendar year of your business, your tax liability for each quarter in the lookback period is considered to be zero. Therefore, you are a monthly schedule depositor for the first calendar year of your business. But see the $100,000 Next-Day Deposit Rule
Semiweekly Deposit Schedule
You are a semiweekly schedule depositor for a calendar year if the total taxes on line 8 of Form 941 during your lookback period were more than $50,000. (Refer to line 11 on pre-2005 versions of Form 941.) Under the semiweekly deposit schedule, deposit Form 941 taxes for payments made on Wednesday, Thursday, and/or Friday by the following Wednesday. Deposit amounts accumulated for payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday. See also Deposits on Banking Days Only later.
Note.
Semiweekly schedule depositors must complete Schedule B ( Form 941), Report of Tax Liability for Semiweekly Schedule Depositors, and submit it with Form 941.
Semiweekly deposit period spanning two quarters. If you have more than one pay date during a semiweekly period and the pay dates fall in different calendar quarters, you will need to make separate deposits for the separate liabilities. For example, if you have a pay date on Wednesday, March 30, 2005 (first quarter), and another pay date on Friday, April 1, 2005 (second quarter), two separate deposits would be required even though the pay dates fall within the same semiweekly period. Both deposits would be due Wednesday, April 6, 2005 (three banking days from the end of the semiweekly deposit period).
Summary of Steps in Determining Your Deposit Schedule
Example of Monthly and Semiweekly Schedules
Rose Co. reported Form 941 taxes as follows:
| 2004 Lookback Period | 2005 Lookback Period |
| 3rd Quarter 2002 $12,000 | 3rd Quarter 2003 $12,000 |
| 4th Quarter 2002 $12,000 | 4th Quarter 2003 $12,000 |
| 1st Quarter 2003 $12,000 | 1st Quarter 2004 $12,000 |
| 2nd Quarter 2003 $12,000 | 2nd Quarter 2004 $15,000 |
|
$48,000
|
$51,000
|
Rose Co. is a monthly schedule depositor for 2004 because its tax liability for the four quarters in its lookback period (third quarter 2002 through second quarter 2003) was not more than $50,000. However, for 2005, Rose Co. is a semiweekly schedule depositor because the total taxes exceeded $50,000 for the four quarters in its lookback period (third quarter 2003 through second quarter 2004).
Deposits on Banking Days Only
If a deposit is required to be made on a day that is not a banking day, the deposit is considered timely if it is made by the close of the next banking day. In addition to federal and state bank holidays, Saturdays and Sundays are treated as nonbanking days. For example, if a deposit is required to be made on a Friday and Friday is not a banking day, the deposit will be considered timely if it is made by the following Monday (if that Monday is a banking day). Semiweekly schedule depositors have at least three banking days to make a deposit. That is, if any of the three weekdays after the end of a semiweekly period is a banking holiday, you will have one additional banking day to deposit. For example, if a semiweekly schedule depositor accumulated taxes for payments made on Friday and the following Monday is not a banking day, the deposit normally due on Wednesday may be made on Thursday (allowing three banking days to make the deposit).
Application of Monthly and Semiweekly Schedules
The terms "monthly schedule depositor" and "semiweekly schedule depositor" do not refer to how often your business pays its Employees or even how often you are required to make deposits. The terms identify which set of deposit rules that you must follow when an employment tax liability arises. The deposit rules are based on the dates when wages are paid (for example, cash basis); not on when tax liabilities are accrued for accounting purposes.
Monthly schedule example: Spruce Co. is a monthly schedule depositor with seasonal Employees. It paid wages each Friday. During March it paid wages but did not pay any wages during April. Under the monthly deposit schedule, Spruce Co. must deposit the combined tax liabilities for the four March paydays by April 15. Spruce Co. does not have a deposit requirement for April (due by May 15) because no wages were paid and, therefore, it did not have a tax liability for April.
Semiweekly schedule example. Green, Inc., which has a semiweekly deposit schedule, pays wages once each month on the last day of the month. Although Green, Inc. has a semiweekly deposit schedule, it will deposit just once a month because it pays wages only once a month. The deposit, however, will be made under the semiweekly deposit schedule as follows: Green, Inc.'s tax liability for the April 29, 2005 (Friday) payday must be deposited by May 4, 2005 (Wednesday). Under the semiweekly deposit schedule, liabilities for wages paid on Wednesday through Friday must be deposited by the following Wednesday.
$100,000 Next-Day Deposit Rule
If you accumulate a tax liability (reduced by any advanceEIC payments) of $100,000 or more on any day during a deposit period, you must deposit the tax by the next banking day, whether you are a monthly or semiweekly schedule depositor.
For purposes of the $100,000 rule, do not continue accumulating a tax liability after the end of a deposit period. For example, if a semiweekly schedule depositor has accumulated a liability of $95,000 on a Tuesday (of a Saturday-through-Tuesday deposit period) and accumulated a $10,000 liability on Wednesday, the $100,000 next-day deposit rule does not apply. Thus, $95,000 must be deposited by Friday and $10,000 must be deposited by the following Wednesday.
However, once you accumulate at least $100,000 in a deposit period, stop accumulating at the end of that day and begin to accumulate anew on the next day. For example, Fir Co. is a semiweekly schedule depositor. On Monday, Fir Co. accumulates taxes of $110,000 and must deposit this amount on Tuesday, the next banking day. On Tuesday, Fir Co. accumulates additional taxes of $30,000. Because the $30,000 is not added to the previous $110,000 and is less than $100,000, Fir Co. must deposit the $30,000 by Friday (following the semiweekly deposit schedule).
If you are a monthly schedule depositor and accumulate a $100,000 tax liability on any day, you become a semiweekly schedule depositor on the next day and remain so for at least the rest of the calendar year and for the following calendar year.
Example:
Elm, Inc. started its business on April 1, 2005. On April 15, it paid wages for the first time and accumulated a tax liability of $40,000. On April 22, 2005, Elm, Inc. paid wages and accumulated a liability of $60,000, bringing its accumulated tax liability to $100,000. Because this was the first year of its business, the tax liability for its lookback period is considered to be zero, and it would be a monthly schedule depositor based on the lookback rules. However, since Elm, Inc. accumulated a $100,000 liability on April 22, it became a semiweekly schedule depositor on April 23. It will be a semiweekly schedule depositor for the remainder of 2005 and for 2006. Elm, Inc. is required to deposit the $100,000 by April 23, the next banking day.
Accuracy of Deposits Rule
You are required to deposit 100% of your tax liability on or before the deposit due date. However, penalties will not be applied for depositing less than 100% if both of the following conditions are met.
- Any deposit shortfall does not exceed the greater of $100 or 2% of the amount of taxes otherwise required to be deposited and
- The deposit shortfall is paid or deposited by the shortfall makeup date as described below.
Makeup Date for Deposit Shortfall
- Monthly schedule depositor. Deposit the shortfall or pay it with your return by the due date of your Form 941 for the quarter in which the shortfall occurred. You may pay the shortfall with Form 941 even if the amount is $2,500 or more.
- Semiweekly schedule depositor. Deposit by the earlier of:
a. The first Wednesday or Friday (whichever comes first) that falls on or after the 15th of the month following the month in which the shortfall occurred or
b. The due date of Form 941 (for the quarter of the tax liability).
For example, if a semiweekly schedule depositor has a deposit shortfall during July 2005, the shortfall makeup date is August 17, 2005 (Wednesday). However, if the shortfall occurred on the required October 5 (Wednesday) deposit due date for a September 30 (Friday) pay date, the return due date for the September 30 pay date (October 31) would come before the November 16 (Wednesday) shortfall makeup date. In this case, the shortfall must be deposited by October 31.
How to Deposit
Electronic deposit requirement: You must make electronic deposits of all depository taxes (such as employment tax, excise tax, and corporate income tax) using the Electronic Federal Tax Payment System (EFTPS) in 2005 if:
- Your total deposits of such taxes in 2003 were more than $200,000 or
- You were required to use EFTPS in 2004.
If you are required to use EFTPS and fail to do so, you may be subject to a 10% penalty. EFTPS is a free service provided by the Department of Treasury. If you are not required to use EFTPS, you may participate voluntarily. To get more information or to enroll in EFTPS, call 1-800-555-4477 or 1-800-945-8400. You can also visit the EFTPS website at www.eftps.gov.
Depositing on time
For deposits made by EFTPS to be on time, you must initiate the transaction at least one business day before the date that the deposit is due.
Deposit record
For your records an Electronic Funds Transfer (EFT) Trace Number will be provided with each successful payment that can be used as a receipt or to trace the payment.
Making deposits with FTD coupons
If you are not making deposits by EFTPS, use Form 8109, Federal Tax Deposit Coupon, to make the deposits at an authorized financial institution.
For new employers, if you would like to receive a Federal Tax Deposit (FTD) coupon booklet, call 1-800-829-4933. Allow 5 to 6 weeks for delivery. The IRS will keep track of the number of FTD coupons that you use and automatically will send you additional coupons when you need them. If you do not receive your resupply of FTD coupons, call 1-800-829-4933. You can have the FTD coupon books sent to a branch office, tax preparer, or service bureau that is making your deposits by showing that address on Form 8109-C, FTD Address Change, which is in the FTD coupon book. (Filing Form 8109-C will not change your address of record; it will change only the address where the FTD coupons are mailed.) The FTD coupons will be preprinted with your name, address, and EIN. They have entry boxes for indicating the type of tax and the tax period for which the deposit is made.
It is very important to clearly mark the correct type of tax and tax period on each FTD coupon. This information is used by the IRS to credit your account.
If you have branch offices depositing taxes, give them FTD coupons and complete instructions so that they can deposit the taxes when due.
Use only your FTD coupons
If you use anyone else's FTD coupon, you may be subject to a failure to deposit penalty. This is because your account will be underpaid by the amount of the deposit credited to the other person's account.
How to deposit with an FTD coupon
Mail or deliver each FTD coupon and a single payment covering the taxes to be deposited to an authorized depositary. An authorized depositary is a financial institution (for example, a commercial bank) that is authorized to accept federal tax deposits. Follow the instructions in the FTD coupon book. Make your check or money order payable to the depositary. To help ensure proper crediting of your account, include your EIN, the type of tax (for example, Form 941), and the tax period to which the payment applies on your check or money order.
Authorized depositaries must accept cash, a postal money order drawn to the order of the depositary, or a check or draft drawn on and to the order of the depositary. You may deposit taxes with a check drawn on another financial institution only if the depositary is willing to accept that form of payment. Be sure that the financial institution where you make deposits is an authorized depositary. Deposits made at an unauthorized institution may be subject to the failure to deposit penalty.
If you prefer, you may mail your coupon and payment to: Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make your check or money order payable to "Financial Agent."
Depositing on time
The IRS determines whether deposits are on time by the date that they are received by an authorized depositary. To be considered timely, the funds must be available to the depositary on the deposit due date before the institution's daily cutoff deadline. Contact your local depositary for information concerning check clearance and cutoff schedules. However, a deposit received by the authorized depositary after the due date will be considered timely if the taxpayer establishes that it was mailed in the United States at least two days before the due date.
Note.
If you are required to deposit any taxes more than once a month, any deposit of $20,000 or more must be received by the authorized depositary by its due date to be timely. See section 7502(e)(3).
Depositing without an EIN
If you have applied for an EIN but have not received it and you must make a deposit, make the deposit with the IRS. Do not make the deposit at an authorized depositary. Make it payable to the "United States Treasury" and show on it your name (as shown on Form SS-4), address, kind of tax, period covered, and date you applied for an EIN. Send your deposit with an explanation to your local IRS office or the service center where you will file Form 941. The service center addresses are in the Instructions for Form 941 and are also available on the IRS website at www.IRS.gov. Do not use Form 8109-B, Federal Tax Deposit Coupon, in this situation.
Depositing without Form 8109
If you have an EIN but do not have a preprinted Form 8109, you may use Form 8109-B to make deposits. Form 8109-B is an over-the-counter FTD coupon that is not preprinted with your identifying information. You may get this form by calling 1-800-829-4933. Be sure to have yourEINready when you call. You will not be able to obtain Form 8109-B by calling 1-800-TAX-FORM.
Use Form 8109-B to make deposits only if:
- You are a new employer and you have been assigned an EIN, but you have not received your initial supply of Forms 8109 or
- You have not received your resupply of preprinted Forms 8109.
Deposit record
For your records, a stub is provided with each FTD coupon in the coupon book. The FTD coupon itself will not be returned. It is used to credit your account. Your check, bank receipt, or money order is your receipt.
How to claim credit for overpayments
If you deposited more than the right amount of taxes for a quarter, you can choose on Form 941 for that quarter to have the overpayment refunded or applied as a credit to your next return. Do not ask the depositary or EFTPS to request a refund from the IRS for you.
Depositing FUTA tax
For deposit purposes, figure FUTA tax quarterly. Determine your FUTA tax liability by multiplying the amount of wages paid during the quarter by .008 (0.8%). Stop depositing FUTA tax on an Employee's wages when he or she reaches $7,000 in wages for the calendar year. If any part of the wages subject to FUTA is exempt from state unemployment tax, you may have to deposit more than the tax using the 0.8% rate. For example, in certain states, wages paid to corporate officers, certain payments of sick pay by unions, and certain Fringe Benefits, are exempt from state unemployment tax.
If your FUTA tax liability for a quarter after 2004 is $500 or less, you do not have to deposit the tax. Instead, you may carry it forward and add it to the liability figured in the next quarter to see if you must make a deposit. If your FUTA tax liability for any calendar quarter in 2005 is over $500 (including any FUTA tax carried forward from an earlier quarter), you must deposit the tax by electronic funds transfer (EFTPS) or in an authorized financial institution using Form 8109, Federal Tax Deposit Coupon.
Note. You are not required to deposit FUTA taxes for household Employees
unless you report their wages on Form 941 or Form 943. See Publication
926, Household Employer's Tax Guide, for more information.
When to deposit
Deposit the FUTA tax by the last day of the first month that follows the end of the quarter. If the due date for making your deposit falls on a Saturday, Sunday, or legal holiday, you may make your deposit on the next business day.
If your liability for the fourth quarter (plus any undeposited amount from any earlier quarter) is over $500, deposit the entire amount by the due date of Form 940 or Form 940-EZ (January 31). If it is $500 or less, you can either make a deposit or pay the tax with your Form 940 or Form 940-EZ by January 31.
Depositing State Taxes
Each state has different rules for depositing taxes and in many cases multiple agencies determining the deposit rules for the various taxes. In general unemployment is a quarterly tax deposit and state income tax withholding varies by the amount withheld. If your state income tax withholding is high you may be required to deposit several times a month. If it is small maybe you will be required to deposit once a month. Even less you may only be required to deposit once a quarter.
Each state's various taxing authorities can be accessed through the public pages of the American Payroll Association. The link to the page that has all of the state agencies is:
www.americanpayroll.org/states.html .
We of course at Payrollonabudget.com and Custom Payroll Associates, Inc. are able to help with any problems that may arise and consult with you on what steps should be taken and when.