Welcome to Lesson 8.
In this lesson, we'll cover your responsibilities for depositing and filing payroll taxes.
At the end of this lesson you will be able to: explain the federal tax deposit process, describe the deposit requirements and penalties that may arise for late deposits, electronically pay your federal tax deposits, and file electronically.
Now that you know how to calculate the payroll taxes, let's talk about how to pay those taxes.
You pay your payroll taxes to the IRS by depositing them directly with the US treasury.
You can do this through your bank or by EFTPS.
How often you pay these taxes depends on the type of tax and the amount.
How do you know when to deposit the taxes?
Let's take a look at the rules for making federal tax deposits, or FTDs.
There are a number of rules about when to deposit your payroll taxes.
The best time to make a tax deposit is to do it the same day you pay your employees.
Here's why.
You get it done right away without any worries about missing deadlines or not having the money when it's due.
You can deposit anytime up through the deposit due date, but if you deposit late penalties kick in.
And what are the due dates?
First if the payroll tax is less than $2500 for the quarter, you can pay it with your form 941, Employer's Quarterly Federal Tax Return, but you have to file on time for this rule to apply.
You use the form 941 to report your quarterly tax liability.
We'll talk more about the 941 later.
Second, if the payroll tax is $2500 or more for the quarter, your deposit is based either on a monthly or a semi-weekly schedule.
How do you figure out whether you use the monthly or the semi-weekly deposit schedule?
You look back to a specific 12 month period called the look back period.
Your look back period is the 12 month period ending on June 30th from last year.
For example, to figure out your deposit schedule for the current year you need to look back to those four previous quarters ending on June 30th of last year.
Gee, why don't they just look at January through December.
By looking at these quarters the IRS can accurately see your tax liability for a full year knowing that any corrections have been made by that time.
If you are a new employer and had no employees during the look back period, or if all your taxes total 50,000 dollars or less for the period, you are a monthly depositor.
If your total taxes are more than 50,000 dollars, you make deposits based on the semi-weekly schedule.
What does it mean to be a monthly schedule depositor?
Under this schedule you deposit monthly payroll taxes by the 15th day of the following month.
If the deposit due date falls on a national or state holiday, make the deposit on the next business day.
Depositing and reporting are separate actions.
Even though you may pay throughout the quarter, you only file the 941 once at the end of the quarter.
If you have over 50,000 dollars in taxes during the look back period, follow the semi-weekly schedule.
Deposit the taxes from payrolls paid on Saturday, Sunday, Monday or Tuesday, by the following Friday.
Deposit the taxes from payrolls on Wednesday, Thursday, or Friday by the following Wednesday.
Again, if the deposit due date falls on a national or state holiday, make the deposit on the next business day.
There is a third deposit rule.
If your payroll tax reaches 100,000 dollars, deposit the funds within one banking day and for the rest of the year use the semi-weekly schedule for all deposits under 100,000 dollars.
Now let's do a short practical exercise.
Let's look again at Ken's ceramic tile business.
Remember, Ken had three employees--Pam, Greg, and Peter.
Let's look at the taxes withheld.
The federal income taxes withheld were $30, $37, and $25.
For a total of $92.
The employee shares of social security taxes withheld is $31, $24.80, and $24.80 coming to a total of $80.60.
Finally the employee shares of Medicare taxes withheld were $7.25, $5.80 and $5.80 totaling $18.85.
The employment taxes withheld from the employees paychecks total $191.45, but before Ken can make his tax deposit he'll need to add his share of the social security and Medicare taxes.
Ken matches the social security tax of $80.60 and the Medicare tax of $18.85 bringing the total tax liability for this payroll to $290.90.
Now assuming that Ken is not a new employer and his payroll was the same for the look back period, let's figure out his deposit schedule.
Remember, in reality you use actual payroll records rather than this rough estimate.
Ken's weekly deposit was $290.90.
Multiplying this amount by 52 weeks his total payroll tax deposits for the look back period are $15,126.80.
But the $15,126.80 is less than the $50,000 amount that requires an employer to pay semi-weekly.
Under these circumstances Ken is a monthly depositor.
If Ken pays $290.90 a week in one quarter, that is definitely more than the $2500 maximum for depositing quarterly.
This is a good time to point something out.
Remember in lesson six where you learned about the advanced earned income tax credit payments to your employees?
Well these payments can be applied against your payroll taxes.
You treat them as payroll tax deposits.
We'll talk more about this in a few minutes.
But if you need to refresh your memory on the advanced earned income tax credit, you can always go back to lesson six for a quick review.
It's not uncommon for a new business to run short of cash, but don't forget the money you hold for your employees is not yours to spend.
You are entrusted with these funds, that's why the penalties are so tough.
The penalties for late deposits can be a big unnecessary expense for your business, in fact many businesses fail, not because they don't know their industry, but because they don't clearly understand and follow the tax deposit requirements.
So make your tax deposits on time.
If you're already paying FTD penalties, here's some good news for you.
The IRS has an FTD penalty refund offer.
This offer gives a late FTD depositor the opportunity to receive a one time penalty refund.
To qualify you must enroll in EFTPS, use EFTPS for one year, that's four consecutive quarters, make all four 941 payments on time and fully pay the penalty.
Remember lesson three gives you a full description of EFTPS.
Earlier you learned how to compute the withholding taxes and how to deposit them.
Now let's discuss payroll tax reporting.
Each calendar quarter all employers who pay wages subject to tax withholding must file form 941.
Some employers don't need to file form 941 quarterly if you're a seasonal, household, or agricultural employer, here are some publications that may help you.
Now let's look at payroll reporting requirements for the majority of small businesses.
Let's take a closer look at form 941.
You use form 941 to report wages paid and the taxes due on those wages quarterly.
A quarter consists of three calendar months starting on the first day of the first month and ending on the last day of the last month of that quarter.
The 941 is due at the end of the following month.
This makes the due dates April 30th, July 31st, October 31st and January 31st.
But if you make all the deposits on time and in full during the quarter you get ten more days to file the 941.
Also if the due date for filing the 941 falls on a Saturday, Sunday or legal holiday, it's due the next business day.
Since we are talking about due dates this is a good time to talk about penalties.
There is a penalty for filing a late 941 tax return, there are also deposit penalties for making late deposits and for not depositing the proper amount.
In addition there are penalties for willful failure to file returns and pay taxes when due, for filing false returns, and for submitting bad checks.
Then interest is charged on the total of unpaid tax and the penalty.
Ouch!
Emily had a discussion about the very same issue.
Let's take a look.
Oh no!
The payroll tax deposit is due tomorrow.
Maybe Bob can help me.
Lawson Accounting Services.
Bob, it's Emily Oaks, I'm so glad you're still in the office.
Emily, how are you, how's the daycare business?
The business is doing great but I have a problem I hope you can help me with.
What's the problem?
I had some unexpected expenses and I used my payroll taxes to pay them.
Now I just realized my deposit is due, what do I do?
What will happen if I put off paying for a week or two?
Late deposits are a bad idea Emily.
The IRS penalties are really stiff.
Let me educate you for a moment.
Let's say a small business owner was late for three deposits of about $3000 each.
The first time he was 7 days late he paid an additional $150 in penalties.
The second time he was 17 days late, he paid $300.
And the last time he didn't pay it until after he got the bill from the IRS.
He paid $450 that time.
Wow!
That's $900 in penalties.
Yes, and remember it is wrong to use your employees trust funds to cover your operating expenses.
That money does not belong to you.
Once you start it is hard to stop.
You're right Bob, but I don't know what else to do.
The money just isn't there.
It is not uncommon for new businesses to have a cash flow problem.
However, once you fail to make deposits on time it can become very expensive.
Let me give you a simple example.
Let's assume you needed $3000 for a year and let's compare three different ways of obtaining the needed money.
If you borrowed the $3000 from your bank at 16% your interest for one year would be $480.
You could put it on your credit card with an 18% rate the interest would be $540 or you use your unpaid tax deposits.
You will incur penalties and interest, the late deposit penalty is $450, then there's the late payment penalty of $360 and don't forget the interest, interest rates are set quarterly and accumulate until you pay.
Let's use 9% as an interest rate, the interest is $270.
If you add all the penalties and interest to the amount that you owe, that's $4080.
IRS calculates the interest and penalties and sends you a bill.
Bottom line, you'll pay a lot more to the IRS.
But you can avoid all this by paying on time.
For more information on penalties and interest read Notice 746 Information About Your Notice Penalty and Interest.
Of course you're going to e-file your 941 because it's easy, fast, and accurate.
We'll talk more about this in a moment, but first what do you need to prepare your 941 return?
You need your EIN.
If you have not received an EIN but have applied for one, you should have a copy of the application showing the date you applied.
State abbreviation, you'll need to know what state you paid employment taxes for.
If you made deposits in more than one state you'll use MU.
The number of employees, total wages paid, include tips reported, taxable fringe benefits provided, and other compensation paid to the employees.
Withheld income taxes, this includes all income taxes withheld from your employees including tax withheld from tips, taxable fringe benefits and certain other payments.
Copy of form 941 for the preceding quarter, this allows you to make any necessary adjustments from the prior quarter.
Total of all wages subject to social security and Medicare taxes.
This amount includes any sick pay and taxable fringe benefits subject to social security taxes.
Records of all tips, this will be added to the wages and other compensation paid.
Records of advance earned income credits paid, as we mentioned before these reduce the amount of employment taxes you pay.
These payments are treated as if they were a direct payment of your taxes on a separate line of the 941.
Record of employment tax deposits.
Always remember to have a record of your tax deposits available when you prepare your quarterly returns.
This information helps you accurately report the amount of your deposits and the type of deposit schedule you are required to use.
You may have paid wages but were not required to withhold income taxes, you'll still include those wages on the 941.
Do not include your contributions to employee plans that are excluded from the employees' wages such as 401K and cafeteria plans.
Also there is a limit on the amount of wages subject to social security taxes.
Once an employee's wages reach the wage limit, do not withhold any more social security tax.
The wage base may change from year to year.
Publication 15 shows the current year's wage base for social security taxes.
All wages paid, however are subject to the Medicare tax.
Now that you know how to figure payments and the most efficient methods of making those payments, let's talk a bit more about the various ways to file your tax returns.
There are options for filing form 941 and in fact most forms with the IRS.
You can e-file or complete and mail a paper tax return.
Let's take a closer look at each one of these options.
If you have a computer, modem, and web based internet access, you can file electronically through an authorized third party transmitter using the 941 online filing program.
The IRS web site, at irs.gov has a list of approved IRS e-file for business providers and e-file for business partners who offer 941 online filing.
Return preparation and filing is easy.
You visit the provider's secure web site and enter the information needed to complete your employment tax return.
The tax is calculated for you and your return is filed online using the services of the 941 online filing provider.
Tax preparation work is automated with return preparation software that performs calculations and highlights needed forms and schedules.
Error rates are less than one percent for returns filed electronically and there's less risk of transcription errors by the IRS.
You sign electronic returns by using a personal identification number, or PIN, allowing the tax information to be secure with only authorized users having access to the system.
Finally you receive an IRS acknowledgement of the receipt of those returns within 48 hours.
Generally the amount of the deposits equals the amounts of the taxes being reported on the return.
However, if you owe additional taxes and the taxes owed are less than one dollar, you do not have to pay the amount.
If you deposited more than the correct amount for a quarter, you may ask for a refund of the overpayment or may have the overpayment applied to the next return.
You must make the choice in writing.
If you owe more than $2500 and are on a monthly schedule for deposits, you must report the employment tax liability for each month based on the dates the wages were paid, not the dates when the payroll periods ended.
If you are a semi-weekly depositor you must complete Form 941 Schedule B, Employer's Record of Federal Tax Liability.
In general this reporting requirement is applicable to those employers who have payroll taxes in excess of $50,000 per year.
The schedule B has daily sections on it.
This allows you to report tax liabilities corresponding to the dates when wages were paid.
Again, use the Schedule B to report the tax liability and not the deposits.
Form 941 Employer's Quarterly Federal Tax Return must be approved or signed by a responsible party.
The return must be signed by, the owner of the business if the business is a sole proprietorship.
The president, vice-president, or other principle officer of the corporation, a responsible and duly authorized member or officer having knowledge of the affairs of a partnership or an unincorporated organization, the fiduciary of a trust or an estate, and if a valid power of attorney has been filed, a duly authorized agent of the employer may sign the return.
In addition you may designate someone else to discuss the form 941 with the IRS by completing the third party designee section of the form.
For instance, if the IRS has a question, you may want us to contact your accountant.
Okay, let's review what you've learned in this lesson.
First we talked about making trust fund deposits, or what the IRS calls federal tax deposits.
Then we talked about the stiff penalties if you make late deposits or no deposits as well as the penalty rebate program that allows you to get back on track through EFTPS.
Finally, we discussed filing your 941 and reviewed the benefits of e-filing.
Whew!
That's a lot to learn.
Fortunately you don't need to remember everything word for word.
What you do need to remember is that employment taxes are a significant responsibility for all employers whether you do the work yourself or pay someone to do it, the ultimate responsibility for your business' employment taxes is yours.
By now you've probably figured out that all the information you need is on the IRS web site.
Most of what we discussed here is in one publication.
Publication 15.
That might be a good one to keep around, and that does it for lesson eight.
Thanks for hanging in there with me, you've gotten off to a great start with this workshop.
Lesson nine is for employers too, it's all about federal unemployment taxes.
For resources discussed in each lesson, please visit the Lesson 10 Supplement.
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