See IRS Publication 15 (Circular E)
Employers are required to make deposits against liability for quarterly employment tax returns (form 941) for each payroll period. Deposit frequency is determined based on the amount of withheld income tax and social security liability for a 12-month “lookback”” period” for each calendar year ending on the prior June 30
- Quarterly with return if the amount due on the return is $2,500 or less
- Monthly on the 15th of the following month if under $50,000 for the prior look-back period
- Semi-weekly if over $50,000 for the prior look-back period
- Wednesday for a payday on the previous Wednesday, Thursday or Friday
- Friday for a payday on the previous Saturday through Tuesday
- Next day if over $100,000 accumulated liability on any day during a monthly or semi-weekly (without regard to the lookback period)
Taxpayers must make deposits using electronic funds transfers (EFT). The penalty for failure to use EFT is 10%. Reg § 31.6302-1(h)(2).
The timeliness of EFT deposits is determined by the date received by the depository. ETA, Electronic Tax Application, payments are deemed paid when received by Federal Reserve Bank.
Penalty amounts under IRC § 6656
- 2% if 1 to 5 days late;
- 5% if 6 to 15 days late;
- 10% if more than 15 days late (there is little incentive to pay until demand is made once this level is reached); and
- 15% if not paid within 10 days of notice and demand by the IRS
- Reasonable cause for abatement of penalties generally requires:
- 1) reasonable cause AND
- 2) lack of willful neglect
Pyramiding of penalties
Once a taxpayer is behind in payments, penalties can “pyramid”. E.g., assume a $10,000 employment tax deposit is due January 15, but only $5,000 is actually paid. Additional deposits of $10,000 due on February 15 and March 15 are each actually paid in full. Under the old statute, the IRS would apply $5,000 of the February deposit to the January shortfall (creating a February shortfall), and, in turn, $5,000 of the March deposit to the February deposit resulting in a march shortfall, causing a 10% penalty to be incurred in each of the 3 months in question.
Designating the period to which penalties are applied to in order to reduce penalties
In contrast, penalties may be reduced by designating the period payments are to be applied to under the Internal Revenue Service Restructuring and Reform Act of 1998. For the above example, the taxpayer could designate the February and March deposits be applied in full to those months, rather than letting the IRS automatically apply payments to the oldest outstanding deposit obligation (and creating further shortfalls and penalties). This designation of payment application results in a 10% penalty for the month of January only. Taxpayers generally have only 90 days after notice of a penalty is received to designate the period to which a particular penalty payment is to be applied.