Employment Tax Withholding and Deposit Requirements
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Understand your Company’s federal employment tax withholding obligations.
Employees Subject to Tax
In general, an employer is required to withhold Social Security and income taxes with respect to each wage payment that the employer makes to an employee. The employer must also make Social Security and unemployment tax payments with respect to wages paid to employees.
Compensation Subject to Tax
In general, all compensation derived from employment ordinarily is subject to employment tax. For these purposes, the designation of compensation as salary, fees, bonuses or commissions is irrelevant. What is important is that the payment is made in consideration for services performed by an employee.
Certain categories of compensation, however, are exempt from tax. For example, compensation in excess of the annual Social Security wage limitation is exempt from Social Security and unemployment taxes. (The annual unemployment wage limitation is $7,000; the annual Social Security wage limitation is adjusted annually for cost-of-living increases.) Exempt wages also include most benefits that are nontaxable to employees. Thus, deferred compensation benefits are typically excluded from employment taxes if the benefits are not currently included in income by employees. An exception to this rule applies for Social Security and unemployment tax purposes in the case of elective salary reduction amounts to certain tax-exempt plans of an employer.
Social Security and withheld income taxes are reported together by employers on the same form. Most employers file Form 941, Employer’s Quarterly Federal Tax Return. This return generally is due one month after the end of each calendar quarter. However, if a tax is required to be deposited and the full amount of the tax is timely paid, the return may be filed by the tenth day of the second month following the calendar quarter. The IRS may notify employers with estimated annual employment taxes of $1,000 or less to file Form 944, Employer’s Annual Federal Tax Return, instead of Form 941. In addition, employers that qualify may request to file Form 944.
Social Security and withheld income taxes generally are deposited with a financial institution qualified as a depositary of federal taxes. The frequency of such deposits is based on the employer’s classification as either a “semi-weekly” or “monthly” depositor. Such status is determined by the IRS each year, and is based on the amount of employment taxes which the employer reported between July 1 and June 30 of the preceding year (the “lookback period”). A different lookback period applies for Form 944 filers. Although the IRS notifies employers before the beginning of each calendar year as to which deposit schedule is required, the employer is responsible for determining the appropriate deposit schedule.
An employer that has reported aggregate employment taxes of $50,000 or less during the lookback period is deemed to be a “monthly” depositor and must deposit each month’s accumulated employment taxes on or before the 15th day of the following month. An employer that has reported more than $50,000 in aggregate employment taxes for the lookback period is considered a “semi-weekly” depositor. Semi-weekly depositors whose payday is a Wednesday, Thursday and/or Friday must deposit their employment taxes on or before the following Wednesday. A semi-weekly depositor whose payday is a Saturday, Sunday, Monday and/or Tuesday must deposit its employment taxes on or before the following Friday. If a deposit obligation falls on a non banking day, monthly depositors have until the end of the next banking day to make the deposit, and semi-weekly depositors have a minimum of three banking days after the end of the semi-weekly period to deposit employment taxes.
If either a monthly or semi-weekly employer’s employment taxes reach $100,000 or more within any semi-weekly period, however, an employer must deposit those taxes on the next banking day. This one-day deposit requirement overrides any other deposit rule, and an employer that reaches this threshold is immediately treated as a semi-weekly depositor for the remainder of the calendar year and for the following calendar year. A new employer is treated as a monthly depositor until it reports more than $50,000 of employment taxes for the prior July 1 through June 30 look back period or until it accumulates $100,000 or more of employment taxes on any day during the month. An employer with less than $2,500 of employment taxes for a calendar quarter may remit its taxes with its quarterly return rather than deposit the taxes separately.
Making Deposits – Electronic Federal Tax Payment System (EFTPS)
The Electronic Federal Tax Payment System (EFTPS) is used by employers for making tax deposits. All deposits of employment and other taxes by employers must be made by EFTPS or another other EFT method such as electronic funds withdrawal or credit or debit card.Employers can enroll in EFTPS using Form 9779, EFTPS Business Enrollment Form, or on-line at www.eftps.gov. Additional information regarding electronic payment options is available on the IRS’s website at www.irs.gov.
Deposit Penalty Safe Harbors
An employer automatically is considered to have met its employment tax deposit obligations if it timely deposits at least 98% of its tax liability or if any deposit shortfall does not exceed $100. No deposit penalties will apply if the above shortfall is deposited by a specified makeup date.
Federal Unemployment Tax (FUTA)
Federal unemployment taxes (FUTA) are reported on Form 940, Employer’s Annual Federal Unemployment Tax Return. This return generally is due on January 31 with respect to wages subject to tax that were paid during the preceding calendar year. However, Form 940 may be filed on or before the 10th day of February if timely deposits were made when required throughout the preceding calendar year.
Year-End Reporting, Including Cost of Health Benefits
Form W-2, Wage and Tax Statement, must be furnished to each employee from whom Social Security and income taxes have been withheld each year. Form W-2 must show the total wages and other compensation paid (whether or not subject to withholding), total wages subject to Social Security tax, and the amounts deducted for income and Social Security tax purposes. Form W-2 must be furnished to employees not later than January 31 following the calendar year in which the employee was subject to withholding.