How to pay employment taxes electronically
By Cora Barnhart, Tax Editor • Bankrate.com

One of the biggest gripes about employment taxes is the time it takes to make those payments to the Internal Revenue Service.

Two million business taxpayers have simplified the process by dumping coupons and checks in favor of telephones or personal computers. This tip explains what business owners need to know about the Electronic Federal Tax Payment System, including who is required to participate. It also explains which business taxes are payable in this manner, as well as how to enroll.

Required users and penalty
According to current tax legislation, business taxpayers with more than $50,000 in employment tax deposits during calendar year 1995, 1996 and 1997 are required to use the electronic payment system.

However, most of the taxpayers currently required to use the system aren't actually participating, thanks to a waiver of the Internal Revenue Code Section 6656 penalty that has been extended through Dec. 31, 1999. In fact, approximately 65 percent of taxpayers who were required to use electronic funds transfer from 1997 through 1999 qualify for this waiver.

So how does a business owner required to use the electronic payment system know whether he risks a penalty if he files taxes some other way? It depends on the federal taxes he deposited in calendar year 1998. The IRS waives the penalty for taxpayers with aggregate deposits of $200,000 or less.

However, if the total amount exceeds $200,000, the business owner is subject to the penalty for failing to use the electronic system as of July 1, 1999. Any business owner who is required to use the system and makes a non-system deposit will be warned once that he will be subject to penalty unless he begins using the electronic system.

Business owners failing to use the system will be charged a penalty equal to 10 percent of each deposit. However, the IRS may excuse the penalty if the failure to use the system is due to reasonable cause, such as an error by the bank charged with making the deposit, instead of intentional neglect.

• Form 720, Quarterly Federal Excise Tax Return
• Form 940, Employer's Annual Federal Unemployment Tax (FUTA) Return
• Form 941, Employer's Quarterly Federal Tax Return
• Form 943, Employer's Annual Tax Return for Agriculture Workers
• Form 945, Annual Return of Withheld Federal Income Tax
• Form 990-C, Farmer's Cooperative Association Income Tax Return
• Form 1120, U.S. Corporation Income Tax Return
• Form CT-1, Employer's Annual Railroad Retirement Tax Return

Enrolling in the program
Business owners interested in using the electronic system must enroll in the program before they begin. 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.

They can start using the system as soon as they receive a payment instruction packet and personal identification number. Taxpayers may make electronic payments via telephone or personal computer, or through their financial institutions.

-- Posted: Aug. 19, 1999