The IRS is strict about the timely depositing of taxes withheld from payroll. Employers have schedules to follow, and noncompliance leads to tough penalties.

Depositing Payroll Taxes

The Deposit Schedule
The large majority of employers must deposit withheld taxes either every two weeks or every month. The IRS makes this determination based on the total amount of taxes withheld, and notifies the employer. Larger payrolls make more frequent tax deposits than smaller payrolls.

To determine deposit frequency, the IRS looks at a recent 12-month period prior to the current tax year. If the employer withheld less than $50,000 during the 12-month period, it makes monthly deposits. Withholdings in excess of $50,000 make the employer a twice-monthly depositor.

Making the Deposit
The employer must make the deposit in a bank that qualifies as a depository for federal taxes, or at a Federal Reserve Bank. Further, the deposit must be in a form that can be immediately credited to the employer's account. That means cash, cashier's check or a company check drawn on a bank in the same city as the Federal Reserve Bank.

Electronic Federal Tax Payment System (EFTPS)

An alternative used by larger employers is an electronic funds transfer. Electronic Deposit is now open to all on a voluntary basis now.

Quarterly Filings

All employers who withhold any federal taxes must file a form with the IRS every quarter. Most employers file a Form 941.

The quarterly filing summarizes:

• Wages, Tips and other compensation
• Amount of Federal Income Tax withheld
• Total Wages subject to Social Security and Medicare Tax
• Total Deposits for the quarter and the amount of over- or under-payment

The quarterly filing is due on the last business day of the month following the end of a quarter. The due dates are the end of April, July, October and January.

Annual Wage and Tax Reporting

Wage & Tax Statement (W-2)
Payroll departments know that the W-2 is the one IRS form they must provide every employee. It must be accurate and must meet a January 31 deadline.

Purpose of the W-2
The W-2 is the payroll department's most crucial tax document. For the employee, the W-2 is the basis for filing income tax forms at the federal and state levels. For the IRS and Social Security Administration, the W-2 tracks each individual's tax obligations.

What is a W-2?
The W-2 is a form produced at the end of the tax year that summarizes an employee's taxable earnings, and the amount withheld during the year for all types of taxes.

The W-2 is a multi-part form. The employer keeps one part for its files. It sends the other parts to:

• The employee
• State tax agencies
• Social Security Administration

Who Gets a W-2?
The employer must complete a W-2 form in the following situations:

• For every employee for which it withheld any Federal Income, Social Security, or Medicare tax
• For every employee who received any Earned Income Credit payments in the year
• For businesses or trades who received payments for services during the year (except independent contractors, who get a form 1099 instead of a W-2)

W-2 Deadlines
Employers must forward W-2 's to the employee by January 31 of each year. The information must go to the Social Security Administration by the last day in February. State deadlines vary, but are never earlier than January 31. Nevertheless, an employer can request, in writing, one 30-day extension on these dates, provided the letter is sent prior to the deadline.

Transmitting W-2 Information
The employer is required to summarize all its W-2 information on a separate form for the Social Security Administration. Even though the W-2 does not go to the IRS, W-2 annual reports must reconcile with the totals reported to the IRS in the quarterly reports. The employer is responsible for making sure these totals match.

Penalties Related to W-2 Filing
The IRS may impose penalties on employers who:

• Fail to file W-2's on time
• Fail to include all required information
• Include incorrect information

Penalties are time sensitive, rising more as time goes by without complete and accurate information.