Payroll Tax Deposit Requirements
by Judy Fletcher, CPA
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 liability. 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.
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.
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.
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, 2006 to June 30, 2007, a business reported taxes of $45,000, then for the year 2008 the business would follow the monthly depositor schedule. If the taxes had been $55,000, the business would follow the semiweekly depositor schedule.
The 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.
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.
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.
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.gov.
About the Author
Judy G. Fletcher, CPA, is a manager with Alexander Thompson Arnold PLLC, a certified public accounting firm in Jackson, Tenn.
See our FAQ page here.