The payroll process includes:
- Calculating and preparing paychecks
- Accounting for amounts withheld from these paychecks
- Making deposits of taxes withheld from paychecks
- Reporting on taxes withheld and deposits made.
This article gives you the basics of the deposit part of this process.
Deferral of Payroll Taxes During the Coronavirus Emergency
The 2020 CARES Act allowed employers to defer the deposit and payment of the employer's share of Social Security taxes. The Social Security taxes are the Social Security part of FICA taxes that have been withheld from employee pay and payable by the employer.
The deferment was for all employers, including those who applied for Coronavirus-related paid leave tax credits and the employee retention credit (ERC). If you have a Paycheck Protection Program (PPP) loan, you may not be able to take this deterrent, depending on whether your loan is forgiven.
The payroll tax deferral period under the CARES Act ran from May 27, 2020, through Dec. 31, 2020. You were required to deposit at least 50% of the deferred amount by Dec. 31, 2020, with the remaining balance deposited by Dec. 31, 2021. You would use IRS Form 941, the employer's quarterly report, to reflect your total payroll tax liability for the remainder of 2020.
To get an estimate of the amount you can defer, multiply the total of Social Security wages for all employees by 6.2%, the employer's part of the Social Security portion of FICA taxes.
Self-employed individuals may defer 50% of the Social Security tax portion of self-employment tax during this same period. The deferred amount isn't used to calculate any estimated tax due.
Employee Retention Credit
In addition to deferments in 2020, some employers are also eligible to receive an ERC. This credit was introduced by the CARES Act, but it was extended by the Taxpayer Certainty and Disaster Tax Relief Act signed into law in December 2020. The ERC is available through June 30, 2021. In 2021, eligible employers can receive a refundable tax credit for their portion of Social Security taxes on up to 70% of an employee's wages.
Employers can therefore reduce their employment tax deposits for the first and second quarters of 2021. Employers with an average of no more than 500 full-time employees may use Form 7200 to request advance payment of the credit after reducing their payments.
What Are Payroll Taxes?
First, let's define what is meant by "payroll taxes." They are the taxes you must pay on your payroll (the amounts you pay to employees for the work they have done). These include:
- Federal income taxes you withheld from your employees' paychecks
- FICA taxes (Social Security/Medicare taxes) you withheld from employees and the matching amount you set aside from that payroll to be paid by your company
- Federal unemployment taxes, based on your total gross payroll (employees don't pay this tax, but it's based on employee pay)
The IRS uses the term "employment taxes" to mean federal income taxes, FICA taxes, and FUTA taxes, instead of the more general term '"payroll taxes." It also includes self-employment taxes in this term.
How the IRS Determines Payroll Tax Deposit Dates
There are several steps in finding the correct payroll deposit dates for your business:
First, find the lookback period. The payroll deposit schedule you use depends mostly on the amount of payroll taxes you owe, based on the past. The IRS determines the payroll tax deposit schedule for employers based on their total gross Social Security/Medicare liability for the 12-month period ending on the most recent June 30. This time period is called a lookback period.
The lookback period to submit employment tax deposits in 2020 would be the 12-month period ending June 30 of 2019.
Then find the amount of your total tax due. The best way to find the amounts for your payroll taxes paid during the lookback period is to look at your 941 Form (the Quarterly Wage and Tax Return) for each quarter. Go to Line 12 (Total taxes after adjustments and credits.). Your deposit schedule isn't determined by how often you pay employees or make deposits.
If you reported $50,000 or less of taxes for the lookback period, you're a monthly schedule depositor. If you reported more than $50,000, you're a semiweekly schedule depositor.
If you are a new employer and you did not have employees during the lookback period, you are a monthly depositor.
Payroll Tax Deposit Due Dates
Monthly deposits must be made by the 15th day of the month following the month when you paid employees. For example, if you paid employees in July, you must make a deposit no later than August 15.
Semi-weekly deposits are made on the following schedule:
- Deposit taxes from payrolls paid on Saturday, Sunday, Monday, or Tuesday by the following Friday.
- Deposit taxes from payrolls paid on Wednesday, Thursday, or Friday by the following Wednesday.
Next-day deposits. If your payroll tax obligation is $100,000 or more, you must deposit the next day and you must continue to make next-day deposits for the rest of that year and the following year.
There is no penalty for deposit errors if they don't exceed $100 or 2% of the amount of employment taxes required to be deposited. You must make up the balance by a pre-defined make-up day to avoid further penalties.
How to Make Federal Payroll Tax Deposits
You can pay with Form 941 if your total tax liability for the quarter is less than $2,500. In all other situations, you must deposit electronically using the IRS EFTPS online system.
Ready for a Payroll Service or Payroll Software?
If all of this work seems overwhelming, you might want to consider either a payroll service or payroll software.
Payroll software can help you with all the details and can make the deposits for you, by connecting with your payroll account. Be sure the software can remind you when payments are due.
A payroll service is an outside company that takes over all of your payroll functions, including sending out reports and payments when they are due, for both federal and state payroll taxes.
Having payroll software or a payroll service doesn't give you a pass on knowing your responsibilities as an employer. You still need to be aware of what reports and payments are due and when.