Its payroll day, yeah, we have processed the employee payments and everybody is happy right? In the real world probably not, but on average most companies do a fantastic job of processing payroll. A significant number of employees receive their payments via direct deposit. But processing payroll is just half of the process. Now we must make sure the employment and federal tax deposits are made timely.
Businesses face an ever increasing list of rules and regulations requiring strict compliance or face significant financial penalties. The legal obligation of reporting employment taxes is one of the most important issues businesses face.
In conversations with IRS and state revenue officers through the years one of the most frequent comments is that late filed returns are a red flag for audit. If a business files their 941 after the due date there is an interest penalty that will be assessed. The penalty ranges from 2% to 10% depending on how far after the due date the 941 is filed.
With federal taxes companies are divided into three categories, monthly depositor, semiweekly depositor or next day depositor. The criteria to determine which schedule the business must follow is determined by the total employment tax liability during the most recent “look back period”. The “look back period” for form 941’s is July 1 – June 30.
- Monthly Depositor – $50,000 or less in employment tax liability for the previous “look back period”. Businesses must make the deposit by the 15th of the month in the month following the month the liability was incurred.
- Semiweekly Depositor – More than $50,000 in tax liability in the most recent “look back period”. Businesses must make their deposit by Wednesday of the next week if the liability was incurred Wednesday through Friday of the preceding week. If the liability was incurred Saturday through Tuesday the deposit is due on Friday.
- Next Day – If at any time during the year the business has a single liability of $100,000, the taxes must be deposited the next day and the business is a semiweekly depositor for the remainder of the “look back period”.
The IRS offers a “safe harbor” providing employers an error margin for under reported employment taxes. The deposit shortfall cannot exceed the greater of $100 or 2% of the total deposit obligation.
Finally, businesses need to be aware of the IRS position on “contracted payroll management”. Many companies today choose to contract out their payroll processing services including the reporting of employment taxes. The IRS has stated several times that the contracting of payroll services, including tax deposits, to a third party does not relieve the business from its legal obligation.
If you use a contracted service the IRS recommends that you:
- Keep all IRS mail correspondence coming directly to you, the business.
- Routinely check the EFTPS system to make sure that the tax deposits were made timely.
These simple steps can identify any issues that may occur.
If you have any questions regarding the deposit schedule for payroll taxes contact gary@IlluminareGroupInc.com or 615-542-1919.
Gary Garner –The Payroll Answer Guy
IRS CIRCULAR 230 — DISCLOSURE NOTICE: IRS Circular 230 regulates written communications about federal tax matters between tax advisors and their clients. To the extent the preceding correspondence and/or any attachment is a written tax advice communication, it is not a full “covered opinion”. Accordingly, this advice is not intended and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS regarding the transaction or matters discussed herein.