The IRS recently launched a pilot program called “Early Interaction Initiative” to try to prevent employers from running into unmanageable payroll tax problems.
When it seems likely that an employer will owe a payroll tax balance at the end of a quarter, IRS revenue officers will contact that employer before the quarterly federal tax return is due, the IRS stated in an e-newsletter sent to payroll professionals. The agency noted that information on federal tax deposits is available in IRS Publication 15, Employers Tax Guide.
Basic Deposit Rules
Employers must deposit quarterly employment taxes they report on Form 941, Employer’s QUARTERLY Federal Tax Return. Employers use Form 944, Employer’s ANNUAL Federal Tax Return only if the IRS notifies them in writing or they’ve asked the agency for permission because they believe their employment taxes for the calendar year will be $1,000 or less.
If you’re starting a new business and have completed Form SS-4, Application for Employer Identification Number, you’ll receive a notice listing the employment tax forms you’re required to file. If you hired employees for the first time and weren’t assigned a specific employment tax return to file, you must file Form 941 unless you contact the IRS to request to file Form 944.
The two forms include federal income tax, as well as employer and employee shares of Social Security and Medicare tax, withheld from your employees. The amount you report determines which deposit schedule you must use, monthly or semiweekly.
Employers make quarterly deposits if their employment tax liability for the preceding quarter or current quarter is less than $2,500. Employers may pay the taxes with their tax returns, provided they don’t incur a $100,000 next-day deposit obligation during the current quarter. If you aren’t sure your total tax liability for the current quarter will be less than $2,500, (and your liability for the preceding quarter was not less than $2,500), make monthly or semiweekly deposits so you won’t be subject to penalties.
If you file Form 941, your deposit schedule for a calendar year is determined from the total taxes in a four-quarter look-back period beginning July 1 and ending June 30. If you reported $50,000 or less of taxes for the look-back period, you are a monthly schedule depositor. If you reported more than $50,000, you are a semiweekly schedule depositor. Monthly schedule depositors shouldn’t file Form 941 or Form 944 on a monthly basis.
The Penalties
Penalties may apply if you don’t make deposits on time or if they’re less than the required amount, unless there’s a justifiable reason and there’s no indication of willful neglect. The IRS also may waive penalties in some circumstances if an employer has filled its employment tax return in a timely manner.
Otherwise, the penalties for late deposits are a percentage of the amount underpaid based on how late the deposit is:
| No. of Days Late | Penalty Rate | Penalty on $3,000 |
| One to five days | 2% | $60 |
| Six to 15 days | 5% | $150 |
| Sixteen or more days | 10% | $300 |
| More than 10 days after first IRS bill | 15% | $450 |
Late deposit penalty amounts are determined using calendar days starting from the due date of the liability.
Special rule for former Form 944 filers: If you’re filing Form 941 for the current year but filed Form 944 the previous year, the penalty won’t apply for January if the taxes are deposited in full by March 15.
Finally, the “trust fund penalty” may be imposed on any person responsible for withholding payroll taxes. That person can be an officer of the company, partner, sole proprietor, employee or a trustee or agent. The individual may be personally liable for 100% of the unpaid taxes, plus interest. Be careful, this penalty is triggered more times that you might think.
The potential penalties provide a strong incentive to comply with the rules. Consult with your tax adviser and coordinate payroll activities with the responsible parties both inside and outside your organization.
