The federal government mandates that employers withhold federal income tax, and Medicare and Social Security (FICA) taxes, from employees’ incomes. Furthermore, employers should withhold state income tax, if the state requires it. Employers should pay all federal income tax and FICA payments to the Internal Revenue Service, based on the schedule the IRS dictates. Employers can make these payments electronically or at an authorized financial institution, such as a commercial bank authorized to accept such deposits.
Federal Employee Tax Payments
File federal income tax and FICA taxes annually if the tax liability is less than $1,000. Use IRS Form 944 (Annual Federal Tax Return) for this method. Effective 2010, if the employer is a Form 944 filer, it can opt out of this alternative by phone no later than April 1, 2010. If it’s an eligible Form 941 (Quarterly Tax Return) filer, it can opt in by phone by April 1, 2010. Thereafter, the IRS will notify it in writing about which method to use.
File federal income tax and FICA tax liabilities quarterly. Most employers have a tax liability of more than $1,000 and are therefore required to file employee federal taxes quarterly using Form 941. The employer can make a payment with its 941 if it did not incur a next-day deposit obligation of $100,000 for the present quarter, if its taxes for the present and previous quarter are less than $2,500 or if it is a monthly depositor who follows the “Accuracy of Deposits Rule.” The latter includes paying all of the tax liabilities prior to or on the due date.
Deposit Schedule for Employee Tax Payments
Pay employee federal income tax and FICA taxes semiweekly or monthly, depending on the “lookback” period. The lookback period starts at the third quarter and ends in the second quarter. According to the 2010 Circular E, if the employer’s reported taxes for the lookback period were $50,000 or less, the deposit schedule is monthly. If the reported taxes were more than $50,000, the schedule is semiweekly.
Suppose the employer reported $60,000 tax liability on Form 941 for the 2010 lookback period, which includes the third and fourth quarter of 2008 and the first and second quarter of 2009. Since the total tax liability for this time frame exceeded $50,000 it would be a semiweekly schedule depositor.
Tips for Making Employee Tax Payments
Contact the state taxation department to determine its payment regulations. The majority of states require employers to perform quarterly wage reporting.
The employer should also consult with the IRS or the Circular E for its payment method. Use Form 8109 (federal tax deposit coupon) to make the payment at an authorized institution. To avoid incurring penalties, use the method the IRS requires. For instance, if the employer is required to pay electronically but fails to do, it could incur a 10% failure-to-deposit penalty. Do not make cash payments; use only check or money order