IRS Finalizes Simplified
Payroll Tax Deposit Rules

Nearly six million employers will find rules for depositing federal taxes easier under new regulations the Internal Revenue Service finalized today. The new rules take effect January 1, 1993, but include a one-year transition period to allow employers to change their payroll systems.

The existing deposit rules are complex and require that employers constantly monitor the amount of accumulated taxes withheld from employees' paychecks. Ins some cases, deposits can be required eight times each month and the deposit schedule can change frequently. Employers had so much difficulty meeting the deposit requirements that the IRS estimated that 30% of all employers required to make deposits were penalized each year for inadequate or late deposits.

In May, the IRS proposed changes to simplify and standardize the system and asked for comments from the public, business and payroll processors. IRS Commissioner Shirley D. Peterson thanked the public, business owners and the payroll community for their suggestions on ways to improve the regulations. "Together, we've made a significant step in reducing the burden on business taxpayers while strengthening the important federal tax deposit system," Commissioner Peterson said.

Under the new regulations, employers will deposit withheld taxes on either a monthly or semi-weekly basis. The determination of which deposit schedule applies will be made by looking back at the employment taxes reported for a 12-month lookback period -- July ! through June 30 of the prior year. The IRS will tell employers by November each year which schedule they will follow for the coming year.

Employers who reported $50,000 or less will deposit monthly. More than 75 percent of all employers -- and most small business employers -- will qualify as monthly depositors. These deposits will be due by the 15th day of the following month.

Employers who will deposit semi-weekly are those who reported over $50,000 during the lookback period. For paydays on Wednesday, Thursday, or Friday, the deposit will be due by the Wednesday after the payday. For all other paydays, the deposit will be due by the Friday following payday.

Whether monthly or semi-weekly, employers always will have at least three banking days after the payday to make the deposit. The IRS noted that all new employers will be monthly depositors.

The regulations also contain special rules and exceptions which carry over from the present rules. Employers accumulating $100,000 during a monthly or semi-weekly period must deposit by the next banking day. Also, employers accumulating less than $500 during the quarter may skip the deposits altogether and send full payment with their quarterly employment tax returns.

As a safe harbor, an employer who underdeposits will not be penalized if the shortfall is $100 or less or less than two percent of the amount which should have been deposited.

The regulations, which will be published in the Federal Register on September 24, contain special rules for holidays and for railroad and farmworker employers. The new deposit rules do not apply to domestic household employers.

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