Remitting Federal Taxes

Once Social Security, income tax, and Medicare taxes have been withheld from an employee's pay, they are essentially the property of the federal government; the company is merely holding them in escrow until the next required remittance date. Depending upon the size of the remittances, a company may periodically cut a check for the remittance amount and deliver it to a local bank or Federal Reserve Bank that is authorized to forward the funds to the IRS. However, companies with larger remittances are required to make electronic funds transfers directly to the IRS. If a company uses a payroll supplier, then this process is invisible to the company, since the supplier will handle remittances.

Assuming that a company processes its own payroll, it must then determine the frequency with which it remits tax deposits to the federal government. A business can make deposits in three ways:

On a monthly basis. Under this approach, a business must deposit its payroll taxes no later than the fifteenth day of the month following the reporting month. This method can be used only if the total amount of deposits during the lookback period is less than $50,000. The lookback period is the four previous quarters during which deposits were reported on Form 941, beginning with July 1 and ending on June 30 of the next year. When making this determination, include all Social Security, federal income, and Medicare taxes withheld during the lookback period. A new employer will generally fall into this category, because the amount of the lookback period (which does not yet exist) is assumed to be zero.

On a semiweekly basis. The government makes it mandatory to use the semiweekly deposit schedule if the dollar volume of taxes during the annual lookback period exceeded $50,000. If it did not, deposits can be made on a monthly basis. Semiweekly refers to two possible dates in each week by which deposits must be made if a payroll payment date falls within that week. If a payment date falls on a weekend, Monday, or Tuesday, then the deposit must be made by the following Friday. If the payment date falls on a Wednesday, Thursday, or Friday, then the deposit must be made by Wednesday of the following week. One additional business day is added to this schedule if the day by which a deposit is required falls on a banking holiday.

Using electronic funds transfers. The minimum threshold for this approach is $200,000 in deposits during the lookback period, or if the company was required to use it in the previous year. Once a company is required to use this method but fails to do so, it will be subject to a 10 percent penalty. Payments are made using the Electronic Federal Tax Payment System (EFTPS). Under this approach, a business notifies its bank of the amount to be deposited with the government; the bank then electronically shifts the funds from the business's account to the government's. This gives the government more immediate access to the funds. No deposit coupon is required if this system is used, since a coupon is required only to identify an accompanying check, and this method requires no check. The payment intervals are the same as those used for semi-weekly depositors, except that any company accumulating $100,000 of taxes for any payroll must deposit it on the business day immediately following the payroll payment date. A business can enroll in the EFTPS by completing the EFTPS Business Enrollment Form (Form 9779).

There is one special case that overrides all of the preceding depositing scenarios. If a company accumulates a payroll tax liability of $100,000 or more as a result of a payroll, the amount must be deposited no later than the next business day, irrespective of the company's status as determined through the lookback method. This special case does not continue to apply if a company's subsequent payroll tax liabilities drop below $100,000; however, if a company had previously been a monthly depositor, this situation will result in the company immediately converting to a semiweekly deposit schedule.

Example. The Red Light Company, maker of lighting fixtures for traffic intersections, reported the following deposit totals:

First quarter 2002	$ 8,500
Second quarter 2002	$ 9,000
Third quarter 2002	$10,000
Fourth quarter 2002	$11,000
First quarter 2003	$15,000
Second quarter 2003	$16,000

The controller wants to know if the company will have to make semiweekly or monthly deposits for the calendar year 2004. Though the total deposits made during 2002 only totaled $38,500, the lookback period is for just the last two quarters of 2002 and the first two quarters of 2003, when tax deposits were somewhat higher. The official look-back period contains deposits of $52,000, which is higher than the government-mandated threshold of $50,000. Consequently, the company must deposit on a semiweekly basis.

Example. The Red Light Company's payroll manager wants to know when deposits must be made to the government, now that the company is required to remit deposits on a semiweekly basis. The company pays its employees on Tuesday of each week, based on hours worked during the preceding calendar week. Since the company always pays its employees on a Tuesday, it has until the following Friday to deposit its taxes.

If remittances are to be made to the local bank, then the check must be accompanied by a Form 8109, which is a standard remittance coupon used for a variety of tax remittances. To obtain a booklet of blank Form 8109s, you must file for an Employee Identification Number (EIN) (described earlier in the "Registering with the Government for Tax Remittances"section). The EIN is required because the IRS preprints an organization's EIN, name, and address on each form in the booklet. Filling out the form is simple enough: just enter the dollar amount being remitted and the company's contact phone number, then darken the ovals corresponding to the type of tax being remitted (in this case, always "941") and the applicable quarter to which the remittance applies. (Note: The information on this form is entered into the IRS database with an optical scanner, so write clearly to avoid scanning errors.)

Special handling of tax deposits is necessary if an employer is a semiweekly depositor and has multiple pay days within the same semi-weekly period, but which apply to different calendar quarters. If this situation arises, the employer must determine which portion of the semiweekly deposit applies to payroll occurring within each of the two calendar quarters, and make a separate deposit for each portion.

Example. The Red Light Company has a pay date on Saturday, September 28,2002, and another on Tuesday, October 1,2002. Deposits for the two pay dates are both due on the following Friday, October 4, but they must be deposited separately.

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Remitting Federal Taxes

Remitting Federal Taxes