Employer Deposit Timing

[Nashville]

Ostensibly, one of my clients has a bi-weekly payroll. Always on Friday, and the tax deposit has to be paid on the following Wednesday. This is (within three business days according to the instructions). I have used the word "ostensibly" because this is the official stance, revealing the following:

Corporation announces in all their literature and employee handbooks that payday is on FRIDAY. All employees have direct deposit. The bank transponding these direct deposits will not guarantee 24-hr service. In order for the company to guarantee employees are paid, they have to transmit their money to this bank on Wednesday.

The usual result is that the employees receive their direct deposit on Thursday. Maybe once a year the cash loop will not be completed on Thursday and they won't really get paid until Friday. This is relatively rare, and when it happens the phone in the payroll office starts ringing with terrified employees. But the company states plainly the employees are paid on Friday.

My question: IRS inflicts a heavy penalty for being late on a 941 deposit. Suppose IRS looks in on this situation and finds out Employees are being paid on Thursday most of the time, but the 941 deposit is being made four days later instead of "within three working days". What will be the position of the IRS?

[TAXNJ]

Irs

Think this maybe the IRS position and requirements. What did your client experience on the issue mention?

http://www.irs.gov/taxtopics/tc757.html

[TAXNJ]

Additional info

Some summary info if applies to your scenario

http://www.carnahanlaw.com/payroll/depositdeadlines.html

Also see page 1 - Removal of Penalities "REASONABLE CAUSE" SECTION

http://www.irs.gov/pub/irs-pdf/n746.pdf

[Roland Slugg]

Whether the employees actually get paid on Thursday or Friday makes no difference (unless the $100,000 rule applies). There is no 3-day rule, per se. Instead withheld taxes for most employers must be deposited on either a monthly schedule or a "semi-weekly" schedule, and from the context of your post, it sounds like the employer in question is a semi-weekly depositor.

Semi-weekly depositors are required to deposit withheld taxes on or before specific days of the week. Withheld and employer taxes from payrolls paid on Sat/Sun/Mon/Tue must be deposited NLT the very next Friday, and the taxes from payrolls paid on Wed/Thu/Fri must be deposited NLT the very next Wednesday. Those deposit dates are always 3-days after the end of the respective semi-weekly pay period cycles ... hence the misnomer the "3-day rule" ... but they can actually be as many as 7 days after an actual pay date itself. Note that taxes from a Wednesday pay date don't have to be deposited until the following Wednesday, five business days or seven calendar days later. Any time there is a federal holiday between the end of a semi-weekly deposit period and the required deposit date, the deposit date is extended by one additional day.

There is an exception whenever the accumulated taxes amount to $100,000 or more. As soon as that happens all accumulated taxes must be deposited by the next business day. This is something to keep in mind if, say, an employer whose taxes are usually less than $100,000 pays year-end bonuses which result in accumulated taxes that exceed $100,000. All accumulated taxes must then be deposited by the next business day.

Care must be taken to insure that required deposits are actually made on time. Most federal taxes must be deposited via EFT, and the EFT system has a cutoff time which, as I recall, is either 7:00p or 8:00p ET for next day credit. Thus, in order to be on time, deposits must be sent via the EFT system no later than the cutoff time the day before they are due. This means that if the $100,000 threshold is met, in order to be on time an EFT deposit must be initiated NLT the evening cutoff time on the very same day!

It is imperative that people responsible for making payroll tax deposits thoroughly understand the deposit rules, as the penalties for depositing late start at 2% for a 1-day late deposit and increase sharply in several stages after that.

All the above ... and a whole lot more ... is covered in IRS Pub 15, AKA Circular E, Employer's Tax Guide. That Pub should be on hand or easily accessible on the computer of anyone responsible for payrolls and tax deposits for any company.

[TAXNJ]

Well

..... All the above ... and a whole lot more ... is covered in IRS Pub 15, AKA Circular E, Employer's Tax Guide. That Pub should be on hand or easily accessible on the computer of anyone responsible for payrolls and tax deposits for any company.

Well stated and excellent key point for any payroll personnel.