Understanding Payroll Tax Payment and Filing Requirements
Employers are required to make federal payroll tax payments to the government, as well as filing the proper reporting and informational returns. Employers must also provide employees and contractors with W-2 and 1099 reports explaining the compensation paid and withholding amounts. There may be state requirements as well. The rules can be complex and penalties for noncompliance severe, which is why the administration of payroll tax responsibilities is often outsourced by small businesses.
Properly handling payroll tax responsibilities involves making sure that:
- your federal and state taxes are paid and reported to the appropriate tax agencies
- you properly report income, amounts withheld, and amounts paid on behalf of employees and contractors
- you maintain the required federal and state records
Accurate and timely compliance is the key to avoiding payroll tax penalties!
When you hire your first employee, you'll need to get a federal employer identification number from the IRS if you do not already have one for your business. You may also need to get state and local tax numbers as well. In addition to assigning an employer identification number (EIN) for use on all your correspondence, deposits, returns, and other documents, the tax agencies will usually supply you with information about your specific payroll tax obligations and may supply the forms you'll need to use when you deposit the taxes and file returns.
For federal payroll tax purposes, you will have both reporting and depositing obligations. Although these relate to the same liability, the tax returns and tax deposits are generally done separately:
- Federal tax deposits must be made on a periodic basis.
- Federal tax returns must be filed on a quarterly or annual basis.
Also, it is important to note that different deposit rules apply to income and FICA (social security) taxes and to FUTA (federal unemployment) taxes.
The multiple filing and due dates can be difficult to calculate and remember. In order to prevent missed deadlines, the IRS publishes an annual calendar of due dates:Tax Calendars for 2016 (Publication 509).
The IRS also provides a free, downloadable Tax Calendar that contains all the federal tax due dates for the year, as well as an electronic reminder system. This calendar is available on the IRS website.
Federal Tax Deposits Must Be Made Electronically
Federal tax deposits must be made electronically, unless the small business exception applies.
There are four methods that an employer can use to electronically transmit tax payments:
- Use the Treasury Department's free Electronic Federal Tax Payment System (EFTPS), either online or the voice response system.
- Ask your financial institution to initiate an ACH Credit payment on your behalf.
- Ask a trusted third party, such as a tax professional or payroll service, to make the payment for you.
- In extraordinary circumstances, ask your financial institution to make a same-day tax wire payment for you.
Limited exception to electronic filing requirement. Small businesses with a federal tax liability of less than $2,500 per quarter still have the option of mailing a check with their quarterly returns.
"Business days” and “legal holidays.” What if the date that you're required to make a federal tax deposit falls on a nonbusiness day? In that case you have until the close of the next business day to make a timely deposit. A business day is any day other than a Saturday, Sunday, or legal holiday. For federal tax purposes, a legal holiday is federal holiday or a legal holiday in the District of Columbia. Other holidays, such as statewide legal holidays, do not delay the due date.
If your deposit's due date happens to fall on a Friday that is a legal holiday in the District of Columbia, you'll have until the end of the following Monday to make your deposit.
Timeliness of deposits. Because you can be assessed penalties for failing to make a tax deposit when it's due, you don't want to be late with your deposits. In general, the timeliness of a deposit is determined by the date it's received.
However, for few businesses that are still eligible to make payments other than by electronic funds transfer, a deposit received after the due date will be considered timely if you can establish that it was mailed at least two days before the due date. This can be done by sending the deposit by registered or certified mail and requesting a return receipt.
Most financial institutions have a specific daily cut-off time for recording deposits. Any deposits received after that time won't be recorded until the following day. So, if you're a qualifying small business and you plan to make deposits in person, be sure to arrive before the cut-off time.
Also, if you're planning to make your deposits using checks drawn on a bank that is different from the one where you're making your deposits, confirm whether the depository bank will consider the check an immediate payment of your tax deposits.
Income and FICA Taxes Deposit Due Dates
The deposit schedule for your employment taxes depends upon the size of your employment tax liability. Generally, toward the end of each year, the IRS tells you which method you should use during the upcoming calendar year. There are four possible options:
Most employers will be required to make semi-weekly or monthly deposits. Only the smallest employers will be able to make annual payments.
Annual tax return and deposit. Small businesses may be able to file an annual payroll tax return (Form 944 Employer's ANNUAL Federal Tax Return) and remit the taxes with that return.
This is an "opt-in" program and you must request permission from the IRS before filing an annual return.You can request to opt-in to the Form 944 program if you:
- have an estimated annual employment tax liability of $1,000 or less for the entire calendar year;
- are not an agricultural employer who is required to file Form 943, Employer's Annual Federal Tax Return For Agricultural Employees and
- are not a household employer who is required to File Form 1040, Schedule H, Household Employment Taxes.
To file Form 944 for calendar year 2016, you must call the IRS at 1-800-829-4933 or 267-941-1000 (toll call) by April 1, 2016, or send a written request postmarked by March 15, 2016. The address depends upon where your business is located.
- Businesses in Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, Wisconsin should mail their request to: Department of the Treasury. Internal Revenue Service, Cincinnati, OH 45999-0038.
- Businesses in Alabama, Alaska, Arizona, Arkansas, California, Colorado, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, Wyoming should mail their request to: Department of the Treasury, Internal Revenue Service, Ogden, UT 84201-0038.
Quarterly deposits for small businesses: If your employment taxes for either the current quarter or the preceding quarter are less than $2,500, you can remit the taxes with your quarterly (Form 941) return. You don't have to deposit them separately.
Look-back to determine monthly or semi-weekly deposits. Assuming that your total taxes for the quarter are $2,500 or more, you will be on either a monthly or semiweekly schedule. The IRS determines your payment schedule based upon the amount of income and FICA taxes you reported during a specified "look-back period."
For each calendar year, the look-back period is the four-quarter period ending on June 30 of the prior year. For 2016, the look-back period is July 1, 2014, to June 30, 2015.
If you reported $50,000 or less in taxes during the look-back period, you deposit on a monthly basis. Otherwise, you deposit on a semiweekly basis. However, all new employers must deposit their employment taxes monthly for their first calendar year.
Monthly deposit requirements. Under monthly depositing, you must deposit the taxes that you're required to withhold or pay on wages paid during a calendar month by the 15th day of the following month. So, amounts withheld or paid on June wages, must be deposited by July 15th.
Semi-weekly deposit requirements. Under semiweekly depositing, you must deposit the taxes associated with wages you pay on Wednesday, Thursday, or Friday by the following Wednesday. You must deposit the taxes associated with wages you pay on Saturday, Sunday, Monday, or Tuesday by the following Friday. However, in no event will you have less than three business days to make your deposit. A business day is any day other than a Saturday, Sunday, or “legal holiday” (i.e., a federal holiday and a legal holiday in the District of Columbia).
For example, if you were a semiweekly depositor who paid wages on Friday and the following Monday was a legal holiday in the District of Columbia, you would have until the following Thursday (instead of Wednesday) to make your deposit.
Failure to deposit full amount on time. Whenever you deposit less than you're required, you run the risk of being hit with a penalty on the underpaid amount. However, as long as any shortfall does not exceed the greater of $100 or 2 percent of the amount you should have deposited, no underpayment penalty will be assessed.
Monthly depositors must make up any shortfall by the due date for their quarterly return. Semiweekly depositors have until the first Wednesday or Friday (whichever is earlier) falling after the 15th day of the month following the month in which the shortfall occurred or, if earlier, the due date for their quarterly return.
FUTA (Federal Unemployment) Tax Deposit Rules
Generally, you must deposit your federal unemployment taxes on a quarterly basis. However, if your quarterly FUTA tax liability is $500 or less, you don't have to deposit it. Rather, you may carry it forward and add it to your FUTA liability for the next quarter. If your liability for the last quarter of the year (plus any undeposited amounts from prior quarters) is $500 or less, you have the option of either depositing the tax or remitting it with your annual return.
Assuming your quarterly FUTA tax liability is more than $500, you must make your quarterly FUTA deposits by the last day of the month that follows the end of each quarter:
|Ending date of quarter ||Deposit due date |
|March 31 ||April 30 |
|June 30 ||July 31 |
|September 30 ||October 31 |
|December 31 ||January 31 |
Federal Payroll Return Requirements
Along with actually depositing your federal payroll taxes, you also have an obligation to file periodic returns that show how you computed your tax liabilities. As is true for deposits, the returns you must file for your income and FICA taxes are different from the returns you file for your FUTA taxes.
Income and FICA Tax Return Requirements
Most employers are required to file Form 941, Employer's Quarterly Federal Tax Return, to report both the federal income taxes you withheld and the FICA taxes you withheld and paid during a calendar quarter. (Employers who qualify for annual reporting/payment, file Form 944.)
The deadline for filing Form 941 is the last day of the first month after a quarter ends. However, if you've been timely with each of your deposits during the quarter, you're entitled to an automatic 10-day extension. No other extensions are permitted for filing Form 941.
If you close your business or otherwise permanently stop paying wages that subject you to payroll taxes, you can end your obligation to file quarterly returns. You do this by designating the return for the last quarter that you pay taxable wages as a "final" return, by checking a box at the top of the return.
FUTA (Federal Unemployment) Tax Return Rules
Unlike income and FICA tax returns, which are due quarterly, the FUTA (federal unemployment tax) return is an annual return. The deadline for filing Form 940, Employer's Annual Federal Unemployment Tax Return is January 31 following the end of a calendar year. However, the "Saturday, Sunday, Holiday Rule" applies if the due date falls on a non-business day. For example, the deadline for filing your 2015 FUTA tax return is January 31, 2016. But this day is a Sunday, so the return will be due on February 1, 2016.
If you've been timely with each of your FUTA tax deposits during the year, you're entitled to an automatic 10-day extension. The IRS may allow you a further extension upon your written request..
State Payroll Tax Filings and Payments
You will generally have to send make tax payments and file returns for two types of state payroll taxes: income taxes and unemployment taxes.
The general rule for income taxes is that each state requires employers to file a quarterly tax and wage report on or before the last day of the month following the calendar quarter; in most cases, if the due date falls on a Saturday, Sunday, or holiday, the due date is extended to the next business day.
Some states now require electronic filing for certain returns and payments. Consult your state's department of revenue for information regarding the required returns and the deadlines for the remittance of withheld income tax. Consult your state unemployment tax agency to contact for information and tax forms relating to unemployment taxes.
Providing Form W-2s and Form 1099s to Workers
In addition to your obligation to file payroll tax returns with your taxing authorities, you have a reporting obligation to your employees and your independent contractors. In essence, you must tell the employees how much you paid them in taxable compensation and how much you withheld from their wages for federal and state income taxes and FICA taxes.
Providing Form W-2s. For federal tax purposes, you must provide a Form W-2, Wage and Tax Statement to each employee who works for you during the calendar year.The W-2s must be distributed by January 31 of the year following the calendar year covered by the form.
Special rules apply for employees who were terminated during the course of the year. These employees may request that you provide their W-2s at an earlier date. When a terminated employee requests the W-2s earlier, you must furnish the forms within 30 days of the request or, if later, within 30 days of your last payment of wages to the employees.
If for any reason you're unable to distribute a W-2 to an employee, be sure to retain the undelivered form as part of your records.
Filing W-2s. You must file copies of your employees' W-2s with the Social Security Administration (SSA) by the end of February. If you file electronically, the due date for the W-2s for 2013 compensation is April 1, 2014. In transmitting the forms, you should file Form W-3, Transmittal of Wage and Tax Statements.
Correcting W-2s. If you have the need to correct or replace a W-2 that you've distributed to an employee or filed with the SSA, use Form W-2c, Statement of Corrected Income and Tax Amounts.
Independent contractors receive a Form 1099-MISC. You don't provide W-2s to your independent contractors, because you generally don't withhold or pay any payroll taxes with respect to them. However, you are required to file a federal information return (Form 1099-MISC) for any independent contractor to whom you've paid at least $600 as compensation for services. Copies of the return must be provided to the contractors by January 31, and to the IRS by February 28.
State reporting. Your state may also require you to prepare information returns for employees and/or independent contractors. Consult your state department of revenue for information on the requirements in your state.
Maintaining Payroll Tax Records and Avoiding Penalties
Once you've paid over your payroll taxes and filed any necessary returns and reports, your last significant obligation is to maintain records that substantiate the payroll taxes you paid.
For federal tax purposes, you must retain records for at least four years after the due date of the return or the date the taxes were paid, whichever is later. A similar record-keeping requirement exists in each state, with varying time periods.
Types of records. There is no particular form prescribed for properly retaining records. However, the records must be kept in a manner that will enable the IRS and your state tax authorities to ascertain whether any tax liability has been incurred and, if so, the extent of that liability.
The types of information you should retain include:
- the name, address, and Social Security number of each employee
- the total amount and date of each payment of compensation
- the period of service covered by each payment of compensation
- the portion of each payment of compensation that constituted taxable wages
- copies of each employee's withholding exemption certificate (Form W-4)
- dates and amounts of tax deposits you made
- copies of returns you filed
- copies of any undeliverable Form W-2
IRS inspection. You're obligated to keep all your required records at convenient and safe locations that are accessible to IRS representatives. And, your records must be available at all times for IRS inspections.
Payroll Tax Penalties Can Be Severe
There really aren't too many opportunities for reducing your exposure to payroll taxes. If you hire employees and pay them any kind of compensation, it's a given that you're going to have some payroll tax liabilities.It is unwise to try and avoid employment tax liability by classifying your workers as independent contractors. The IRS, the Department of Labor and their state counterparts are aggressively targeting employers to uncover misclassification, and the penalties are severe.
Perhaps your biggest opportunity for realizing any kind of real savings is to make sure you tend to each of your obligations and avoid getting hit with penalties. Many of the potential payroll tax penalties are the same ones you'll find when you're dealing with other types of taxes. For example, there are both criminal and civil penalties for failing to timely file payroll tax returns or to timely deposit taxes you owe.
There are, however, a couple of penalties of which you should be particularly mindful as you deal with your payroll tax obligations:
100 percent penalty. The biggest risk you face in administering your payroll tax obligations is that you can be held personally liable for all income and FICA taxes that you willfully either fail to withhold from your employees' wages or fail to pay to the IRS and your state tax agencies.
Even if you avoid the 100-percent penalty because your conduct wasn't "willful," you could face smaller penalties if your failure to withhold was due to your misclassification of an employee as an independent contractor. In the context of tax penalties, willfulness requires that the individual's conduct be intentional, knowing, and voluntary.
In some cases, a reckless disregard of obvious facts will suffice to show willfulness.
Form W-2. If you fail to prepare a Form W-2 for your employees, or if you willfully furnish incorrect ones, you will be subject to a penalty, per each statement that should have been sent or that was incorrectly prepared.