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How to deposit employment taxes correctly

April 20, 2000 -- According to a 1998 study conducted for the Small Business Administration, one in every five businesses filing bankruptcy identifies trouble with the IRS as the source of its predicament.

How do businesses get themselves in this jam? Many new business owners who hire employees find themselves torn between wrestling with deposit taxes and postponing this task until the business gets under way. Succumbing to strategy No. 2 has proven to be the recipe to disaster for many a budding entrepreneur.

In general, any business that hires an employee is required to make certain tax deposits. These include any income tax withheld, Medicare taxes, and the employer's and employee's share of Social Security. Traditionally, mailing or delivering their payments to an authorized financial institution or Federal Reserve Bank has taken care of this.

Deposits are made either by the Electronic Federal Tax Payment System, if required, or by using a Form 8109, Federal Tax Deposit Coupon, which must accompany your payment.

The Form 8109 should have arrived with your coupon book that came after you acquired an Employer Identification Number. If you have a deposit due and there is not enough time to obtain a coupon book, you can get a blank coupon (Form 8109-B) by calling 1-800-829-1040.

Electronic age
Certain business owners must electronically deposit those payments. The law requires electronic deposits from business owners whose total deposits, including deposits for employment tax, excise tax and corporate income tax for 1998 exceeded $200,000. If you are interested in using the electronic system, you must enroll in the program first. Obtain an enrollment form or get additional information by calling the system's customer service toll-free at 1-800-945-8400 or 1-800-555-4477.

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Looking back
Knowing whether deposit taxes are required or supposed to be deposited electronically isn't enough to stay out of trouble. You also have to make sure those deposits are made on time. And being timely has nothing to do with how often you pay your employees or make deposits. Your schedule depends on the total tax liability you reported on Form 941 -- the employer's quarterly federal tax return -- during a four-quarter lookback period, a period that begins July 1 and ends June 30 as shown in Table 1.

Anyone who reported $50,000 or less of taxes for the lookback period is a monthly schedule depositor. Anyone who reported more than $50,000 will have to make those deposits semiweekly.

And there is one other thing for electronic depositors to keep in mind. For these deposits to be on time, the transaction should be made at least one business day before the date the deposit is due.

Monthly or semiweekly deposits
Under the monthly deposit schedule, deposit Form 941 taxes on payments made during a month by the 15th day of the following month. Don't file Form 941 every month, though. Also, the IRS advises not filing Form 941-M, Employer's Monthly Federal Tax Return, unless an IRS representative requests it.

What about new employers? After all, at least during the first calendar year of your business, your tax liability for each quarter in the lookback period is going to be zero. Generally, this means you will be a monthly schedule depositor for the first calendar year of your business. But you still have to follow the $100,000 Next-Day Deposit Rule.

What is this rule? It applies any time an employer incurs a tax liability of $100,000 or more on any day during a deposit period. The IRS requires someone in this situation to deposit the tax by the next banking day. It doesn't matter whether the taxpayer is a monthly or semiweekly schedule depositor.

What about the semiweekly depositors out there? Under the semiweekly schedule, deposit Form 941 taxes on payments made on Wednesday, Thursday, and/or Friday by the following Wednesday. Deposit amounts accumulated on payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday.

For more information, consult IRS Publication 15: Employer's Tax Guide and Form 941 deposit instructions.


-- Posted April 20, 2000

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