IRS Depositing Rules
As mentioned in a previous article, certain amounts from employee wages are deducted and sent to the IRS for Social Security and Medicare. When an employer deposits these amounts, there are certain rules established by the IRS which must be adhered to. Whenever deductions are taken out of an employee’s pay, this amount is a liability owed to the IRS. With multiple employees and the amounts owed by the employer, the accumulated liability can quickly become a sizeable amount which must be paid. If it is not paid, the IRS can charge penalties or shut down the business. Therefore, it is important that deductions are taken and sent to the IRS on time.
The IRS utilizes a pay-as-you-go tax model, where taxes are owed as payment amounts withheld from employees. These amounts are deposited to either an authorized financial institution or the Electronic Federal Tax Deposit System. Deposits can come on a monthly or semi-weekly basis and must be chosen before the beginning of the year. If the deposit due is less than or equal to $50,000 for a lookback period or if a business has just started, the monthly method must be used. For larger amounts, deposits must come semi-weekly for a lookback period. However, note that if accumulated tax liabilities are over $100,000 at any point during a deposit period, it must be deposited by the next banking day.
If the monthly method is used, taxes owed for a specific month must be deposited by the 15th of the following month. If the semi-weekly method is used, the deposit date depends on when employees are paid. If employees are paid from Wednesday through Friday, taxes must be deposited on Wednesday. If employees are paid from Saturday through Tuesday, taxes must be deposited on Friday.
Deposits are also determined using the lookback period, which is broken into four quarters: two from the prior year and two from two years prior. For example, the first two quarters for the year prior to 2015 would be January 1 to March 31, 2014 and April 1 to June 30, 2014. The last two quarters for the two years prior would be July 1 to September 30, 2013 and October 1 to December 31, 2013. Deposits made within a quarter are detailed in Form 941.
Many employers offer unemployment compensation to workers who have been let go, in the form of payments to sustain them between jobs. This amount is liable for taxation on the federal and state level. If employees work for at least 20 weeks, they are eligible for unemployment compensation benefits. When reporting this amount to the IRS, either Form 940 or 940-EZ is used. This information is filled out annually and should be submitted by January 31 for the previous year’s information. You are qualified to use the 940-EZ form if your business pays all state-level unemployment taxes to a single state and pays all state-level taxes by the due date.
Federal unemployment taxes are deposited quarterly by the end of the first month after a quarter. Unemployment taxes do not need to be paid until taxes total $500 or more. If the amount is less than $500, the amount rolls over to the next quarter. To determine unemployment tax rates, wages which are subject to taxation are multiplied by the federal unemployment tax rate of .8%. Unemployment taxes also apply on the state level, though specifics vary among states. For the correct information, look into tax forms supplied by the state.