Thursday, March 8, 2012

Federal Tax Deposits 101

By Catherine Gonzaga

For a small business owner, keeping track of all the different state and federal deadlines for filing forms and paying fees and taxes is often one of the most overwhelming aspects of running the business.  If you have employees, one of the most important federal requirements to keep in mind is the federal tax deposit (FTD).

What is an FTD?  A federal tax deposit is made up of the taxes that you withhold from your employees’ salaries and your matching half of the social security and Medicare taxes.  The amount due is calculated on Forms 941 and 944, which must usually be filed one month after the end of each quarter.

Who has to make FTDs?  Generally, any employer that files Form 941, Employer’s Quarterly Federal Tax Return, with $2,500 or more of employment tax due in the current quarter or the previous quarter must make an FTD.  This means that if your Form 941 for the current quarter shows only $2,000 in employment taxes due, but your Form 941 for the previous quarter showed $2,600 due, you must make an FTD for the current quarter.

How do I make an FTD? As of December 31, 2010, the IRS requires that all FTDs be made through the Electronic Federal Tax Payment System (EFTPS).  The deposits can be made over the phone or online at www.eftps.gov.  To sign up for the services, you’ll need your Employer Identification Number (EIN) and your bank account information.

How often do I have to make my FTD?  That depends on how much you owed in taxes in previous quarters.  If you’re a new business owner and have never previously had to pay employment taxes, you need to make your deposits monthly by the 15th day of the month after wages are paid (i.e. Dec 15 for all wages paid in November).  If you have previously had to pay employment taxes and the amount due over a certain “lookback period” exceeds $50,000, then you need to make your deposits semi-weekly. The day the deposit is due depends on the day you pay your employees.

If You Fall Behind on Deposits, Your Personal Assets May Be At Risk  When your employees file their taxes each year, the portion of your FTDs that represents the amounts withheld from their paychecks is credited towards the taxes they owe for the year, and in some cases, is refunded to them.  Because this portion technically belongs to your employee, the IRS can hold you personally responsible for this amount if the FTDs were not made.  This is called the Trust Fund Penalty.  The IRS has been vigilant about pursuing this penalty in delinquent employment tax cases this year.

Your Options  If you do fall behind on your FTDs or other business taxes, there are payment options available to you and your business such as a monthly installment agreement.  To take advantage of these options however, you must be “current” on your FTDs.  To the IRS, “current” means not only paying your FTDs in full, but also paying them on time, so keeping up with the deadlines is crucial.

The IRS Offers Free Help  Because all of the details can be intimidating and hard to keep track of, the IRS has a few services that can introduce you to the various federal requirements for your small business.  A nine-part video workshop is available here: http://www.irsvideos.gov/virtualworkshop/, and an interactive 2012 calendar with deadlines noted can be found at: http://1.usa.gov/xhWrZz.
Catherine Gonzaga is an Associate Tax Attorney at the Law Offices of Richard Carpenter and a volunteer for ACCION San Diego. She received a Master of Laws in Taxation from the University of San Diego and a Juris Doctorate from the University of Washington. She enjoys supporting local businesses in any way she can.

For questions or inquiries regarding this article or any other tax issue, please contact Catherine at:  (619) 236-1225 or rctaxlawoffice2@aol.com.

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