Employers are required to make federal payroll tax payments to the government, as well as filing the proper reporting and informational returns. Employers must also provide employees and contractors with W-2 and 1099 reports explaining the compensation paid and withholding amounts. There may be state requirements as well. The rules can be complex and penalties for noncompliance severe, which is why the administration of payroll tax responsibilities is often outsourced by small businesses.
Properly handling payroll tax responsibilities involves making sure that:
- your federal and state taxes are paid and reported to the appropriate tax agencies
- you properly report income, amounts withheld, and amounts paid on behalf of employees and contractors
- you maintain the required federal and state records
Accurate and timely compliance is the key to avoiding payroll tax penalties!
Getting started with employees
When you hire your first employee, you'll need to get a federal employer identification number from the IRS if you do not already have one for your business. You may also need to get state and local tax numbers as well. In addition to assigning an employer identification number (EIN) for use on all your correspondence, deposits, returns, and other documents, the tax agencies will usually supply you with information about your specific payroll tax obligations and may supply the forms you'll need to use when you deposit the taxes and file returns.
For federal payroll tax purposes, you will have both reporting and depositing obligations. Although these relate to the same liability, the tax returns and tax deposits are generally done separately:
- Federal tax deposits must be made on a periodic basis.
- Federal tax returns must be filed on a quarterly or annual basis.
Also, it is important to note that different deposit rules apply to income and FICA (social security) taxes and to FUTA (federal unemployment) taxes.
The multiple filing and due dates can be difficult to calculate and remember. In order to prevent missed deadlines, the IRS publishes an annual calendar of due dates: Tax Calendars for 2021 (Publication 509).
The IRS also provides a free, downloadable Tax Calendar that contains all the federal tax due dates for the year, as well as an electronic reminder system. This calendar is available on the IRS website.
Federal tax deposits must be made electronically
Federal tax deposits must be made electronically, unless the small business exception applies.
There are four methods that an employer can use to electronically transmit tax payments:
- Use the Treasury Department's free Electronic Federal Tax Payment System (EFTPS), either online or the voice response system.
- Ask your financial institution to initiate an ACH Credit payment on your behalf.
- Ask a trusted third party, such as a tax professional or payroll service, to make the payment for you.
- In extraordinary circumstances, ask your financial institution to make a same-day tax wire payment for you.
Limited exception to electronic filing requirement. Small businesses with a federal tax liability of less than $2,500 per quarter still have the option of mailing a check with their quarterly returns.
"Business days” and “legal holidays.” What if the date that you're required to make a federal tax deposit falls on a non-business day? In that case you have until the close of the next business day to make a timely deposit. A business day is any day other than a Saturday, Sunday, or legal holiday. For federal tax purposes, a legal holiday is federal holiday or a legal holiday in the District of Columbia. Other holidays, such as statewide legal holidays, do not delay the due date.
If your deposit's due date happens to fall on a Friday that is a legal holiday in the District of Columbia, you'll have until the end of the following Monday to make your deposit.
Timeliness of deposits. Because you can be assessed penalties for failing to make a tax deposit when it's due, you don't want to be late with your deposits. In general, the timeliness of a deposit is determined by the date it's received.
However, for few businesses that are still eligible to make payments other than by electronic funds transfer, a deposit received after the due date will be considered timely if you can establish that it was mailed at least two days before the due date. This can be done by sending the deposit by registered or certified mail and requesting a return receipt.
Most financial institutions have a specific daily cut-off time for recording deposits. Any deposits received after that time won't be recorded until the following day. So, if you're a qualifying small business and you plan to make deposits in person, be sure to arrive before the cut-off time.
Also, if you're planning to make your deposits using checks drawn on a bank that is different from the one where you're making your deposits, confirm whether the depository bank will consider the check an immediate payment of your tax deposits.
Income and FICA taxes deposit due dates
The deposit schedule for your employment taxes depends upon the size of your employment tax liability. Generally, toward the end of each year, the IRS tells you which method you should use during the upcoming calendar year. There are four possible options:
Annual tax return and deposit. Small businesses may be able to file an annual payroll tax return (Form 944 Employer's ANNUAL Federal Tax Return) and remit the taxes with that return.
This is an "opt-in" program and you must request permission from the IRS before filing an annual return.You can request to opt-in to the Form 944 program if you:
- have an estimated annual employment tax liability of $1,000 or less for the entire calendar year;
- are not an agricultural employer who is required to file Form 943, Employer's Annual Federal Tax Return For Agricultural Employees and
- are not a household employer who is required to File Form 1040, Schedule H, Household Employment Taxes.
To file Form 944 for calendar year 2016, you must call the IRS at 1-800-829-4933 or 267-941-1000 (toll call) by April 1, 2016, or send a written request postmarked by March 15, 2016. The address depends upon where your business is located.
- Businesses in Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, Wisconsin should mail their request to: Department of the Treasury. Internal Revenue Service, Cincinnati, OH 45999-0038.
- Businesses in Alabama, Alaska, Arizona, Arkansas, California, Colorado, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, Wyoming should mail their request to: Department of the Treasury, Internal Revenue Service, Ogden, UT 84201-0038.
Quarterly deposits for small businesses: If your employment taxes for either the current quarter or the preceding quarter are less than $2,500, you can remit the taxes with your quarterly (Form 941) return. You don't have to deposit them separately.
Look-back to determine monthly or semi-weekly deposits. Assuming that your total taxes for the quarter are $2,500 or more, you will be on either a monthly or semiweekly schedule. The IRS determines your payment schedule based upon the amount of income and FICA taxes you reported during a specified "look-back period."
For each calendar year, the look-back period is the four-quarter period ending on June 30 of the prior year. For 2016, the look-back period is July 1, 2014, to June 30, 2015.
If you reported $50,000 or less in taxes during the look-back period, you deposit on a monthly basis. Otherwise, you deposit on a semiweekly basis. However, all new employers must deposit their employment taxes monthly for their first calendar year.
Monthly deposit requirements. Under monthly depositing, you must deposit the taxes that you're required to withhold or pay on wages paid during a calendar month by the 15th day of the following month. So, amounts withheld or paid on June wages, must be deposited by July 15th.
Semi-weekly deposit requirements. Under semiweekly depositing, you must deposit the taxes associated with wages you pay on Wednesday, Thursday, or Friday by the following Wednesday. You must deposit the taxes associated with wages you pay on Saturday, Sunday, Monday, or Tuesday by the following Friday. However, in no event will you have less than three business days to make your deposit. A business day is any day other than a Saturday, Sunday, or “legal holiday” (i.e., a federal holiday and a legal holiday in the District of Columbia).
For example, if you were a semiweekly depositor who paid wages on Friday and the following Monday was a legal holiday in the District of Columbia, you would have until the following Thursday (instead of Wednesday) to make your deposit.
Failure to deposit full amount on time. Whenever you deposit less than you're required, you run the risk of being hit with a penalty on the underpaid amount. However, as long as any shortfall does not exceed the greater of $100 or 2 percent of the amount you should have deposited, no underpayment penalty will be assessed.
Monthly depositors must make up any shortfall by the due date for their quarterly return. Semiweekly depositors have until the first Wednesday or Friday (whichever is earlier) falling after the 15th day of the month following the month in which the shortfall occurred or, if earlier, the due date for their quarterly return.
FUTA (federal unemployment) tax deposit rules
Generally, you must deposit your federal unemployment taxes on a quarterly basis. However, if your quarterly FUTA tax liability is $500 or less, you don't have to deposit it. Rather, you may carry it forward and add it to your FUTA liability for the next quarter. If your liability for the last quarter of the year (plus any undeposited amounts from prior quarters) is $500 or less, you have the option of either depositing the tax or remitting it with your annual return.
Assuming your quarterly FUTA tax liability is more than $500, you must make your quarterly FUTA deposits by the last day of the month that follows the end of each quarter: