Employers need to pay payroll taxes to the IRS, abiding by a specific payment schedule. Keep reading to learn how this payment schedule works.
Payroll Taxes: A Four-Step Guide to Payment Schedule
Step 1. Stay Up-to-Date with Current Payroll Tax Rates
Employers need to deposit payroll taxes, which are based on the salaries they pay each employee. These taxes cover four types of payments, which are:
- Federal income tax
- FICA taxes
- Federal unemployment tax
- State income tax
These taxes fund the country’s social welfare programs, such as Social Security and Medicare. A considerable chunk of the defense and security, as well as education budgets, are also sourced from these taxes.
Federal income tax is determined by the tax brackets passed by Congress and approved by the IRS. Refer to this article for the current federal income tax brackets.
Meanwhile, Social Security and Medicare payments constitute FICA taxes. In total, these taxes amount to 15.3% of an employee’s gross income, divided between employee and employer.
Federal unemployment tax is solely shouldered by employers. This tax collection, currently starting at 6% of the initial $7000 gross payroll, funds the country’s unemployment benefits, which goes to laid-off employees.
State income tax varies from one state to another. States such as Alaska, Florida, Washington, Texas, Wyoming, and South Dakota do not impose this tax collection.
Accounting for these taxes should be aptly incorporated within a business’s payroll practice. Failure to do so may lead to legal consequences.
Step 2. Understand the “Lookback” Period as Implemented by the IRS
The lookback period refers to the 12-month period that culminated on June 30th of the previous year. The IRS looks back to this timeframe to anticipate an employer’s upcoming payment schedule for its payroll taxes.
- The lookback period for 2019 payroll tax payment schedule is between June 2017 to June 2018
- The lookback period for 2020 payroll tax payment schedule is between June 2018 to June 2019
Here, payment schedule means both the dates in which payroll taxes must be paid and the amount that needs to be deposited by a business entity to the IRS. The lookback period allows the IRS to gauge the veracity of submitted payroll tax statements.
Any abrupt discrepancy between a payroll tax deposit made and its corresponding lookback period will alert the IRS of potential tax manipulations. Fortunately, there is a way to avoid this possible mishap.
That is via referring to the IRS Quarterly Wage and Tax Return Forms (941 forms). All Form 941 from the four quarters of the lookback period must be adequately assessed to determine the current payment schedule.
Here’s how it’s done:
1. On the 941 form, go to Total Taxes After Adjustments (Line 10).
2. Add the entries from Line 10 of these 941 forms.
3. The resulting sum amounts to the payment schedule.
For employers who file the Employer’s Annual Federal Tax Return (Form 944), a different lookback period is followed. This lookback period skips one fiscal year; for instance, 2019’s payment schedule will fall between 2016 and 2017.
The IRS exempts new employers from the lookback period rule.
Veracity Definition: Accuracy; conformity to facts
Step 3. Know the Specific Rules that Govern Payroll Tax Payment Schedule
The IRS allows two deposit schedules for payroll taxes. These are semiweekly and monthly.
Employers whose lookback period reports at least $50,000 of payroll taxes follow the semiweekly deposit schedule. Here’s how it works:
- For paydays on a Wednesday, Thursday, or Friday, the IRS expects payroll tax deposit on the next Wednesday.
- For paydays on a Saturday, Sunday, Monday or Tuesday, the IRS expects payroll deposits on the following Friday.
Employers whose lookback period reports payroll taxes not exceeding $50,000 follow the monthly deposit schedule. Generally, the IRS expects monthly payroll taxes on the 15th of the succeeding month.
This means that payroll taxes for the month of August must be deposited on the 15th of September. Keep in mind the difference between deposit dates and tax form filing schedule.
Tax forms must be filed no later than a month after an expired quarter. For instance, for the January to March quarter, payroll taxes must be filed no later than the 30th of April.
Aside from the general rules mentioned above, the IRS imposes other specific guidelines governing payment schedules, such as the following:
- Quarterly payroll tax below $2,500 may be deposited alongside a “timely filed return.”
- For payroll taxes amounting to at least $100,000, next-day deposits must be made.
- The IRS imposes penalties for deposit errors exceeding 2% of the total payroll taxes. Penalty rates may fall between 5% and 25% of the total tax due.
- For deposit schedules that fall on a non-banking day, such as Saturdays, Sundays and state and federal holidays, deposit date is deferred to the next banking day.
Step 4. Choose from IRS-Approved Payroll Tax Deposit Options
The IRS requires an electronic deposit of payroll taxes. This rule applies to all except those who need to pay less than $2,500 of quarterly payroll taxes.
Four IRS-approved modes of payment exist. They are as follows:
- Via the free Electronic Federal Tax Payment System (EFPS) run by the US Treasury Department
- Through ACH credit payment, as coordinated with a financial institution
- Via a payroll service or tax professional
- Via same-day tax wire, as accomplished by a financial institution
Keep in mind that all financial institutions follow a cut-off time for financial transactions. Any deposit made after this cut-off time will have to wait until the next day to be recorded.
For small businesses that are eligible for non-electronic payment deposit, postmark date within the payment deadline will be considered. The IRS penalizes late payments under specific rules.
Knowing the right payment schedule for depositing payroll taxes exempts employers from potential late payment fines and interests. This consequently ensures that a business entity is consistently in good standing with the IRS.
How do you stay in good standing with the IRS in terms of payroll tax payment schedules? Please share your tips and advice in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.