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Chapter 8

Chapter 8. Depositing and Reporting withheld tax. 8.1 Employer Identification Numbers. To ensure all payments are credited to the correct employer, an EIN is assigned How to get an EIN? Application online – able to get and use EIN immediately By Fax-TIN – EIN issued within 4 business days

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Chapter 8

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  1. Chapter 8 Depositing and Reporting withheld tax

  2. 8.1 Employer Identification Numbers • To ensure all payments are credited to the correct employer, an EIN is assigned • How to get an EIN? • Application online – able to get and use EIN immediately • By Fax-TIN – EIN issued within 4 business days • By Phone – able to get and use EIN immediately • Paper form SS-4 – 4 to 5 weeks for receipt of EIN • If EIN not received in time for quarterly/annual filing, write “APPLIED FOR” in EIN space and date of application

  3. 8.1 Employer Identification Numbers Mergers, consolidations & reincorporation • Proper EIN to use after a corporate merger or acquisition depends on its characterization under the Internal Revenue Code. • If a reorganization, use the previously assigned EIN • A new EIN is required if a new company merges as a result of the reorganization if it does not qualify as a reorganization by IRS rules

  4. 8.2 Depositing Withheld Income & Employment Taxes • Taxes are not necessarily paid when filing a return • Must deposit the taxes per the IRS’ assigned frequency • Payroll Tax Deposit Rules • Based on the look back period • Example 1: For calendar year 2014 the look back period is July 1, 2012 to June 30, 2013 • Monthly • If total tax liability for the look back period equals $50,000 or less • Semiweekly • If total tax liability for the look back period exceeds $50,000

  5. 8.2 Depositing Withheld Income & Employment Taxes 2013 Look back Period 2014 Look back Period 3rd qtr 2011 - $12,000 4th qtr 2011 - $12,000 1st qtr 2012 - $12,000 2nd qtr 2012 - $12,000 $48,000 Total employment tax liability $48,000 < $50,000 = Monthly Depositor 3rd qtr 2012 - $13,000 4th qtr 2012 - $13,000 1st qtr 2013 - $13,000 2nd qtr 2013 - $13,000 $52,000 Total employment tax liability $52,000 > $50,000 = Semi-Weekly Depositor

  6. 8.2 Depositing Withheld Income & Employment Taxes • Nonpayroll withholding treated separately • Employers must also withhold federal income from “nonpayroll” payments it makes, including: • Reportable payments subject to backup withholding • Gambling winnings • Retirement pay for service in the Armed Forces • Pension, annuities, IRAs & other deferred income • These are all reported on Form 945 annually. They are not included on the quarterly 941.

  7. 8.2 Depositing Withheld Income & Employment Taxes • Very small employers with annual tax liability of $1,000. or less would file a Form 944 and pay liability annually • IRS only sends depositor status notices to employers with a change in their deposit schedule for the upcoming tax year

  8. 8.2 Depositing Withheld Income & Employment Taxes New Employers • Classified as monthly depositors because they have no tax liability experience during the look back period OR until they accumulate more than $50,000. in tax liability during a look back period OR trigger the one-day rule • Look back period begins on first day of operations and ends on the next June 30. Successor Employers • Successor company with the same EIN as predecessor company has the same deposit frequency as the predecessor. • Successor company with new EIN is considered a monthly depositor.

  9. 8.2 Depositing Withheld Income & Employment Taxes Railroad & Farm employers • File annual employment tax returns rather than quarterly • Look back period is the second calendar year preceding the current calendar year • Agricultural employers may have both farm and nonfarm employees • Will file both Form 943 and Form 941 • Separate determinations for depositor status

  10. 8.2 Depositing Withheld Income & Employment Taxes

  11. 8.2 Depositing Withheld Income & Employment Taxes

  12. 8.2 Depositing Withheld Income & Employment Taxes

  13. 8.2 Depositing Withheld Income & Employment Taxes One – day Deposit Rule • If accumulated employment tax liability reaches $100,000 on any day during a monthly or semiweekly deposit period, the taxes must be deposited by the close of the next business day • Monthly depositors then become a semiweekly depositor for the remainder of the current calendar year and the entire next calendar year.

  14. 8.2 Depositing Withheld Income & Employment Taxes • Quarterly “de minimis” deposit rule • Accumulated tax liability of less than $2,500 for any quarter can be deposited according to the employer’s depositor status or pay with their Form 941 • Effective in 2010, this safe harbor also applies if the tax liability was less than $2,500 for the immediately preceding quarter.

  15. 8.2 Depositing Withheld Income & Employment Taxes • Form 944 – Annual employment tax liability reporting for small employers • Employment tax liability of $1,000 or less qualifies small employers for this annual filing. • Employers are notified by the IRS of their qualification for the Employers’ Annual Federal Tax Program (EAFTP) • Tax liability is paid with a timely filed Form 944 • Not held to the monthly or semiweekly depositor statuses • If liability of $1,000 is exceeded, employer is no longer qualified; however, will still file Form 944 for that calendar year & Form 941 for the succeeding years

  16. 8.2 Depositing Withheld Income & Employment Taxes • Saturday, Sunday and holiday extension • If the due date of the deposit is not a business day (Saturday, Sunday, or a federal legal holiday), the deposit is due on the very next banking day • Semiweekly depositors are guaranteed at least 3 business days after the last day of the semiweekly period to make their deposit • *If any of the 3 days is not a business day, the employer has an additional day to deposit

  17. 8.2 Depositing Withheld Income & Employment Taxes Shortfall rule • IRS allows a “safe harbor” shortfall so employers are not penalized for depositing a small amount less than the entire amount of the deposit obligation and not be penalized • Obligation is satisfied if the shortfall is no more than the greater of $100 or 2% of the entire amount due • All deposits must be made timely & shortfall is deposited by the appropriate make-up date. • Monthly depositors – shortfall must be deposited by the 941 due date • Semiweekly depositors – shortfall must be deposited by the 1st Wednesday or Friday occurring on or after the 15th of the month after the month during which the original deposit was due

  18. 8.2 Depositing Withheld Income & Employment Taxes Timeliness of deposits • Generally, deposits are considered timely by the IRS if received via EFTPS and the amount is withdrawn from the employer’s account on or before the due date

  19. 8.2 Depositing Withheld Income & Employment Taxes How to Deposit Payroll Taxes • Electronic Deposits have now replaced FTD coupons • A provision of the North American Free Trade Implementation Act (NAFTA) amended the IRC & requires the implementation of an Electronic Federal Tax Payment System (EFTPS) for the collection of federal depository taxes. • Exception: Does not apply to employers with total employment liability of less than $2,500. Payment is made with Form 941 or 944.

  20. 8.2 Depositing Withheld Income & Employment Taxes EFTPS requirements • Organizations that deposit more than $200,000 in total federal tax deposits in any year must use EFTPS to make all their federal deposits beginning with the first return period in the second succeeding calendar year. • Once an employer is required to file electronically, it cannot go back to using paper coupons.

  21. 8.2 Depositing Withheld Income & Employment Taxes Electronic Federal Tax Payment System • Employers that are required to deposit electronically must use EFTPS • Enrollment: • New business taxpayers are pre-enrolled • Newly required taxpayers enroll with Form 9779, Business Enrollment form for EFTPS or online at www.eftps.gov • Enrollment verifies company info & notifies the IRS of the deposit method selected • EFTPS-Direct (ACH Debit) • EFTPS-Through a Financial Institution (ACH Credit)

  22. 8.2 Depositing Withheld Income & Employment Taxes Paper Deposits • Employers who are not required to use EFTPS may use federal tax deposit coupons and pay check, cash or money order. • Along, with the deposit the employer must provide the bank with a completed Form 8109, Federal Tax Deposit Coupon • Non-payroll withheld taxes and FUTA payments are made the same way if there is no EFT requirement.

  23. 8.2 Depositing Withheld Income & Employment Taxes Penalties for Failure to Deposit on Time • 2% x undeposited amount for 1-5 days • 5% x undeposited amount for 6-15 days • 10% x undeposited amount for > 15 days • 15% x undeposited amount if not paid within 10 days after the ER receives its first IRS delinquency notice • Special Rule for electronic depositors: • An employer required to deposit electronically, that uses a paper coupon & check is subject to the 10% failure-to-deposit penalty because it failed for more than 15 days to make the deposit in the correct manner, even though the paper deposit was made timely

  24. 8.2 Depositing Withheld Income & Employment Taxes Employer Relief • IRS allows for instances to waive penalties for late deposits: • IRS may waive the failure-to-deposit penalty for an employer’s inadvertent failure to make a deposit with certain criteria • IRS may also waive the failure-to-deposit penalty if the employer can show reasonable cause

  25. 8.2 Depositing Withheld Income & Employment Taxes Deposit changes were mandated by the IRS • Restructuring & Reform Act of 1998 • Require IRS to apply deposits to the most recent period within the tax period to which the deposit relates • Shortfall rules: The payment is treated as a liability for a deposit period IMMEDIATELY BEFORE the shortfall make-up date and after the end of any other deposit period ending before the shortfall make-up date • Penalty notices for specific tax period – can contact IRS within 90 days and redesignate where the deposit is to be applied.

  26. 8.2 Depositing Withheld Income & Employment Taxes Redesignating estimated tax payments as employment tax deposits • If employer determines its corporate income tax liability for the current tax year will be less than the amount of estimated income tax payments already made, the employer can redesignate some of the estimated income tax it has paid as employment tax deposits

  27. 8.2 Depositing Withheld Income & Employment Taxes • Employer can avoid an averaged failure-to-deposit penalty by: • Monthly payer – verify monthly liability section of Form 941 is completed properly • Semiweekly payer – verify the Schedule B is properly completed (tax LIABILITY dates are to be used instead of tax PAYMENT dates) • If employer is a semiweekly payer per IRS rules and does not complete a Schedule B, the penalty is computed by taking the total adjusted tax liability and distributing it equally throughout the period

  28. 8.2 Depositing Withheld Income & Employment Taxes IRS can … and WILL … apply a 100% penalty for not withholding and paying taxes • Known as the “Trust Fund Recovery Penalty” or the “100% Penalty” • Responsible person must have acted willfully in not withholding and paying over withheld income and employment taxes • Notice must be given at least 60 days before IRS can issue a notice & demand for payment of penalty • The liability for the penalty can be shared • PEO’s can face trust fund penalties as well

  29. 8.2 Depositing Withheld Income & Employment Taxes • Criminal Penalties can also be assessed • If found guilty, the person(s) are guilty of a felony and can be fined up to $10,000. and/or imprisoned for up to 5 years • Penalty and interest notices must be detailed – part of IRS Restructuring & Reform Act of 1998 • Include name of penalty • IRC section under which it is imposed • Computation of the penalty • If interest is imposed, must include IRC section and calculation of the interest

  30. 8.3 Form 941Who Must File Form 941 Employers exempt from filing Form 941 • Seasonal employers that do not pay wages regularly • Businesses that withhold federal income tax from only nonpayroll items • Employers that report only withheld taxes on domestic workers • Employers that report only wages for employees in US territories • Agricultural employers • Employers that have an annual employment tax liability of no more that $1,000 & file Form 944

  31. 8.3 Form 941Who Must File Form 941 Business Reorganizations • If an employer sells or transfers its business, a separate Form 941 must be filed by both the previous and current owners • Each must only report the wages it paid and taxes it withheld Statutory merger or consolidation of two businesses • Surviving corporation must file Form 941 for the quarter during which the change took place, reporting for both companies • The reporting results in discrepancies between the amounts shown on the surviving corporation’s Forms W-2 and 941 for the year of the merger or consolidation • Surviving corporation should file Schedule D (Form 941) Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations with final 941 of year

  32. 8.3 Form 941Completing the Form Form 941 is scannable • Created so that it can be scanned by IRS • Scanning requires conformity • Substitutes that follow the format will be acceptable • Forms should not be submitted to the IRS for specific approval • Software developers and form producers send in a PDF format to assist the IRS in preparing to scan the forms • Beginning 1 Qtr 2011, no business packages will be mailed out by IRS. To get forms, go to www.irs.gov.

  33. 8.3 Form 941Completing the Form Completing Form 941 • 12-point Courier font • Omit dollar signs • Enter dollars to the left of the pre-printed decimal points & cents to the right • Use of commas is optional • Leave blank any data field with a value of zero • Enter negative amounts using a minus sign, if possible, otherwise use parentheses • Enter the employer’s name & EIN on all pages & attachments • Staple multiple sheets in the upper left corner for filing

  34. 8.3 Form 941Completing the Form • Form must have employer’s signature • Owner, if sole prop • Principal corporate officer, if corporation or LLC (treated as a corp) • Authorized member or partner of an unincorporated association or partnership (including LLC treated as a partnership) • Owner of a single member LLC • A fiduciary if the employer is a trust or estate

  35. 8.3 Form 941Completing the Form • Forms signed by agents • Agent obtains authorization from the IRS by having the employer designate the agent on Form 2678, Employer / Payer Appointment of Agent • Attorney, accountant, other representative or employee must obtain a proper power of attorney by completing Form 2848, Power of Attorney and Declaration of Representative

  36. 8.3 Form 941Completing the Form • Third party can discuss form with IRS • Employer must check the “Yes” box in Part 4 of Form 941 and • Enter the name, phone number, & 5-digit personal identification number of the third party • This authorizes the designee to: • Provide the IRS with any missing information from the Form 941 • Call the IRS for any information about processing • Respond to the IRS concerning IRS notices that the employer has shared with the designee about math errors on the form and return preparation

  37. 8.3 Form 941Completing the Form • Does not authorize the designee to receive a refund check • Bind the employer to anything or otherwise represent the employer • Designation expires one year from the due date of the Form 941 • Can be revoked beforehand by either the employer or designee

  38. 8.3 Form 941Completing the Form • Alternative signature methods • 1998 – IRS Restructuring and Reform Act – Electronic signatures • 2005 – Facsimile signatures allowed • This procedure is primarily a convenience for payroll service providers • New Employers • Yet to be assigned an EIN should type the words “Applied For” and the date of the application in the EIN space provided on the form

  39. 8.3 Form 941Completing the Form • Employers going out of business • Check the box on Line 18 when completing its last Form 941 & enter the last date on which wages will be paid • Attach a statement showing the address where the employer’s records will be kept, name of the person keeping the records, & if business was sold, the name & address of the new owner

  40. 8.3 Form 941Completing the Form • Claiming the COBRA credit on Form 941 • American Recovery and Reinvestment Act of 2009 • Refundable payroll tax credit • Taxes to offset: • Employee federal income tax withholding • Employee share of social security & Medicare taxes • Employer share of social security & Medicare taxes • If the COBRA credit taken exceeds the amount of the employer’s payroll tax liabilities, the employer is entitled to a tax refund from the US Treasury or a credit to the next quarter

  41. 8.3 Form 941Completing the Form • Form 941 was amended in 2009 by adding Lines 12a and 12b. • 12a = amount of the credit being claimed • 12b = number of eligible individuals who paid the discounted COBRA premium • Employers can claim the credit as soon as the eligible individual pays the 35% discounted premium • IRS will apply the full amount of the COBRA credit reported on Line 12a & treat it as deposited on the 1st day of the quarter; each deposit thereafter will be treated as timely up to the amount of the credit

  42. 8.3 Form 941Completing the Form • Look back period is unaffected • Computed from Line 8 of Form 941 – Total Taxes After Adjustments – before taking into account any credits. • Next Day deposit rule applies to employment tax liability prior to applying the credit to the payment • COBRA credit does not have to be taken in the quarter in which it was paid, can be taken in a later quarter in the same calendar year or on Form 941-X for the quarter in which the subsidy was provided

  43. 8.3 Form 941Completing the Form • COBRA credit does not affect Schedule B reporting • Schedule B (Form 941) is used to report an employer’s tax liability for each time it makes payments subject to employment taxes, not the amount of the tax deposits • For Monthly depositors, the monthly tax liability totals reported in Part 2 of Form 941 is unaffected • Employers must maintain supporting documentation related to the discounted subsidy claim; currently IRS does not require reporting of these items other than the offset amount (list on page 8-31)

  44. 8.3 Form 941Completing the Form • Payments made with Form 941 • For employers that qualify with employment tax liability of less than $2,500 in the current or preceding quarter • Include Form 941-V, Form 941 Payment Voucher with the employer’s Form 941 and include the following: • EIN or “Applied For” if unassigned • Darken the oval for the quarter • Employer’s name & address • Amount paid • These employers cannot take advantage of the 10-day extension granted to employers that have deposited their entire tax liability on time throughout the quarter

  45. 8.3 Form 941Completing the Form • Payment can be made via phone or internet using a credit or debit card. • If filing Form 941 via e-file, you can e-pay balance due using a tax preparation software or through a tax professional. This payment is known as EFW – Electronic Funds Withdrawal. • And, of course, you can ALWAYS pay using EFTPS!

  46. 8.3 Form 941When & Where to File Form 941 If the Form 941 due date falls on a Saturday, Sunday or legal FEDERAL holiday, the due date becomes the next business day.

  47. 8.3 Form 941Completing the Form • Mailed Forms 941 • Considered filed on the date of the postmark on the envelope by the USPS and can be timely filed even if received after the due date • “Post Mark Rule” – applicable for IRS designated PDS (Private Delivery Service) • Important to retain certified mail receipts to serve as proof of timely filing

  48. 8.3 Form 941Completing the Form • Proof of mailing vs proof of delivery • Certified or registered mail are the only way to prove mailing & support the presumption that a document has been delivered even if the IRS shows no record of receipt • IRS provides addresses for mailing paper Form 941 in the Form 941 instructions

  49. 8.3 Schedule B (Form 941) • Filed by: • Semiweekly depositors • Monthly depositors that accumulate at least $100,000 in employment tax liability during a month • Records an employer’s payroll tax liability on the date payments were made subject to payroll taxes • Not deposits made • Not recorded on date paid • IRS uses it to determine if the employer has deposited its federal employment tax liabilities on time

  50. 8.3 Schedule B (Form 941) • Amending a previously filed Schedule B • Semiweekly depositor: If an employer has been assessed a failure-to-deposit penalty for a quarter & made an error on Schedule B that will not change the total liability for the quarter that was reported on Schedule B may be able to reduce the penalty by filing a corrected Schedule B • Monthly depositor: Employers can also file a Schedule B if they have been assessed a failure-to-deposit penalty for a quarter & made an error on the monthly tax liability section of Form 941. Only the correct monthly totals should be entered, daily entries are not required • File Amended Schedule B with the Form 941-X for a tax decrease or a tax increase ONLY.

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