If the employer receives IRS notification of a monthly deposit schedule, it is the employer’s responsibility to verify the liability during the lookback period has not exceeded the limits for a monthly schedule depositor.
Federal Deposit Rules
All employers must deposit social security, Medicare, and withheld income taxes using a monthly or semi-weekly deposit schedule. Quarterly and daily deposits may be required on an exception basis only.
An employer incurs liability when wages are paid (the check date), not when wages are accrued (period-end date). Each tax quarter is separate and stands alone for reporting purposes. The four tax quarters are:
January 1 - March 31
April 1 - June 30
July 1 - September 30
October 1 - December 31
Lookback Period
Before the beginning of each calendar year, the IRS determines each company’s deposit schedule by examining the company’s total taxes reported on line 8 of Forms 941 in the “lookback period.” The lookback period consists of four quarters, starting July 1 and ending June 30: the first two quarters of the previous year, and the last two quarters of the year before. For example, to determine a company’s deposit schedule for 2007, the IRS looks at third and fourth quarter of 2005 and first and second quarter of 2006.
In the fourth quarter, the IRS notifies all employers of their deposit schedule for the coming year. Although the IRS notifies employers of their deposit schedule, the employer is ultimately responsible for determining which schedule to use.
Monthly Schedule Depositors
If an employer reported federal taxes of $50,000 or less in the lookback period, he is a monthly schedule depositor. The federal liability for the month must be deposited by the 15th day of the following month.
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If the employer receives IRS notification of a monthly deposit schedule, it is the employer’s responsibility to verify the liability during the lookback period has not exceeded the limits for a monthly schedule depositor. |
Semi-weekly Schedule Depositors
If an employer reported more than $50,000 of federal taxes in the lookback period, he/she is required to follow the rules in the semi-weekly deposit schedule.
The liability incurred on wage payments made to employees on Wednesday through Friday must be deposited by the following Wednesday. The employer has three banking days after the end of the semi-weekly period (in this case, Friday) to make the deposit.
The liability incurred on wage payments made to employees on Saturday through Tuesday must be deposited by the current Friday. The employer has three banking days after the end of the semi-weekly period (in this case, Tuesday) to make the deposit.
Semi-weekly Deposit Period Crossing Two Quarters
If you have more than one check date during a semi-weekly period and the check dates are in different calendar quarters, separate deposits are required for the separate liabilities. Two separate deposits are required even though both deposits are due on the same day (three banking days after the semi-weekly period). Each tax quarter stands alone and the taxes must be recorded separately on each quarter’s Form 941.
Make Deposits Only on Banking Days
Deposits can only be made on legal banking days. Banking days do not include Saturdays, Sundays, legal holidays, and any local banking holidays observed by authorized commercial banks (for example, Patriot’s Day, the third Monday in April). If a deposit is due on a non-banking day, the deposit is considered timely if it is paid on the next banking day.
$2,500 Rule (Quarterly)
If an employer accumulates less than $2,500 tax liability during a quarter, no deposits are required during the quarter; the liability can be paid with a timely filed Form 941.
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If the employer accumulates $2,500 or more by the end of the quarter and fails to make monthly deposits, he is subject to deposit penalties. The IRS recommends that an employer who is not sure that liability will be less than $2,500 follow the monthly deposit schedule. |
$100,000 Rule (Daily)
If the total accumulated federal liability reaches $100,000 or more on any day during a deposit period, it is due on the next banking day regardless of the employer’s regular deposit schedule.
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This rule only applies during a monthly or semi-weekly deposit period. For example, if a semi-weekly depositor has accumulated liability of $95,000 on a Tuesday (of a Saturday - Tuesday period) and accumulated $10,000 of liability on Wednesday (of a Wednesday - Friday period), the $100,000 rule does not apply. |
If a monthly depositor accumulates a $100,000 federal liability on any day during the month, the employer automatically becomes a semi-weekly depositor. This employer remains a semi-weekly depositor for the rest of the year, and will be a semi-weekly depositor for the following calendar year.
After a semi-weekly depositor accumulates liability of $100,000 or more in a deposit period, the total accumulated amount above $100,000 is not carried over to the next day’s amount. The next day starts again at $0.
Accuracy of Deposits (98% Rule)
An employer is required to deposit 100% of his tax liability on or before the deposit due date; however, a penalty will not be assessed if both of these conditions are met:
any deposit shortfall does not exceed 2% of the required deposit or $100, whichever is greater, and
the shortfall is deposited by the shortfall makeup date.
Example: An employer made a deposit of $9,850 that should have been $10,000. Because the employer deposited at least 98% of the amount due, he is not penalized as long as the remaining tax due is deposited by the shortfall makeup date.
Makeup Dates for Deposit Shortfall
Monthly schedule depositors
Deposit the shortfall or pay it with the return by the due date of Form 941 for the quarter in which the shortfall occurred.
Semi-weekly schedule or one-day rule depositors
Deposit by the earlier of:
the first Wednesday or Friday, whichever is earlier, that falls on or after the 15th of the month after the shortfall occurred
or
the due date of Form 941 for the quarter in which the shortfall occurred.
How to Deposit
An employer is required to make electronic deposits of all taxes if:
if they were required to make electronic deposits in the previous year, or
total deposits of taxes were more than $200,000 in 2004.
Qualifying employers who fail to make electronic deposits may be subject to 10% failure-to-deposit penalty.
An employer who is not required to deposit electronically can use Form 8109, Federal Tax Deposit Coupon, to make deposits at an authorized financial institution such as a commercial bank.
Filing Form 941
Quarterly, an employer who pays wages subject to social security, Medicare, and federal income tax is required to file Form 941, Employer’s Quarterly Federal Tax Return. This tax return reconciles the federal tax liabilities incurred to the deposits made. Generally, Form 941 is due by the last day of the month following the end of the quarter. Seasonal employers no longer have to file for quarters when they paid no wages.
For additional information, refer to the Circular E, Employer’s Tax Guide.