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Text File | 1996-08-23 | 18KB | 431 lines

@144 CHAP 5

          ┌───────────────────────────────────────────┐
          │         WITHHOLDING OF INCOME TAXES       │
          └───────────────────────────────────────────┘

@IF000xx](NOTE: The following is not currently applicable to your
@IF000xx]business, as @NAME has no employees.)
@IF000xx]
@IF049xx](NOTE: Your firm has employees.  Accordingly, the following
@IF049xx]employee tax withholding requirements will be applicable to
@IF049xx]your @ENTITY, @NAME.)
@IF049xx]
Once you go into business and become an employer, the
government automatically appoints you as an agent to collect
federal taxes from your employees, by withholding taxes
from their wages.  You don't get paid for doing this; in
fact, you will be hit with heavy penalties if you DON'T
properly calculate, withhold from your employees' wages,
and pay over federal income and FICA taxes.  One of the
very first things you should do when starting a new business,
unless you will be a sole proprietor with no employees, is
to file a Form SS-4 with the I.R.S., requesting an "Employer
Identification Number" and a set of pre-printed Federal Tax
Deposit forms (Form 8109).  You will need these coupons to
pay over the withheld taxes and the employer portion of the
FICA (Social Security) tax to a depository bank.  Note that
you can't generally make these payments directly to the
I.R.S. -- you must instead deposit them with a bank that is
an authorized tax depository, along with the properly coded
tax deposit coupon.

As a general rule, the more withheld income tax and FICA
taxes you have to deposit, the more promptly you have to
deposit the taxes.  The rules for when you must make federal
tax deposits can be briefly summarized as follows:

____________________________________________________________

          "SIMPLIFIED" TAX DEPOSIT RULES:
____________________________________________________________

Since 1993, the federal employment tax deposit rules have
been considerably simplified, as follows:

All employers are considered to be either "monthly" or
"semi-weekly" depositors.  You will be considered a "monthly
depositor" if the total amount of employment taxes (income
tax and FICA taxes) you reported for the "lookback period"
(which is the 12 months ended on the most recent June 30th)
was $50,000 or less.  Otherwise, you are considered a
"semi-weekly depositor."  A monthly depositor must deposit
all federal employment taxes for each calendar month by the
15th day of the next month.

Semi-weekly depositors have until the following Wednesday to
deposit taxes withheld on Wednesday, Thursday, and/or Friday.
For taxes withheld on Saturday through Tuesday, a deposit
must be made on or before the following Friday.  (If the
deposit due date is not a banking day, then the deposit is
not due until the next banking day.)

However, there is one exception to the above rules:  If,
on any day an employer has $100,000 or more of accumulated
undeposited employment taxes, these taxes are required to be
deposited by the close of the next banking day.  (Note that
a monthly depositor only counts taxes withheld for a given
calendar month, in determining if the $100,000 threshold has
been reached; similarly, a semi-weekly depositor counts only
those taxes withheld during the semi-weekly period in
question, Wednesday-Friday or Saturday-Tuesday.)  Once an
employer becomes subject to the one-day rule for the first
time, such an employer will no longer be a monthly depositor
for the rest of that calendar year or during the following
calendar year.

Under both these new rules, penalties may be imposed by
the IRS on late deposits at the rates of:

 .  2% for deposits less than 5 days late;

 .  5% for deposits 5 to 15 days late;

 .  10% for over 15 days

 .  15% in case of failure to correct under-deposit
    within 10 days after date of first delinquency
    notice.

EFT PAYMENTS
------------

Electronic Funds Transfer ("EFT") payments of withholding
and FICA taxes are now required of certain very large
employers in 1995.  Over the next few years, EFT payment
requirements will be phased in for smaller employers, and
will eventually apply to all but the smallest employers by
1999.

The IRS is gradually shifting over to electronic funds
transfers (EFT) as a mode of payment, in place of the tax
deposit system described above.  Taxpayers will eventually
be required to remit withholding, payroll, excise, corporate
income, and certain other taxes by EFT payment, either
directly, or by means of an intermediary, third party bulk
data processor.  The EFT payment requirements began phasing
in on January 1, 1995, for certain large employers, but
smaller employers, not yet required to make EFT remittances,
now have the option of also making EFT payments.

The applicable effective dates for phase-in of EFT
requirements are as follows, based on the "threshold
amount" of combined FICA and income tax withholding in
the "determination period":

                                              Applicable
Threshold               Determination         Effective
Amount                     Period                Date
-----------------   -------------------    --------------------
$78 million         1-1-93 to 12-31-93      Jan. 1, 1995
$47 million         1-1-93 to 12-31-93      Jan. 1, 1996
$47 million         1-1-94 to 12-31-94      Jan. 1, 1996
$50 thousand        1-1-95 to 12-31-95      July 1, 1997
$50 thousand        1-1-96 to 12-31-96      Jan. 1, 1998
$20 thousand        1-1-97 to 12-31-97      Jan. 1, 1999

Employers with under $20,000 of annual FICA and federal
income tax wage withholding will apparently not be required
to make EFT payments.


TAXLINK SYSTEM FOR EFT PAYMENTS
-------------------------------

To implement the new EFT system, the IRS has developed the
Taxlink system, which uses the same Automated Clearing House
(ACH) network that was has already in place for such items
as Social Security and veterans benefits payments and
automatic loan payments.  Since all but the smallest employers
will be required to participate in the EFT payment system
by 1999, you may want to voluntarily sign up and participate
in Taxlink voluntarily, before you are required to.

Taxlink permits EFT payments to be made directly from a
taxpayer's bank account to the U.S. Treasury's general
account, either by telephone or computer, using one of two
payment options:  ACH debit or ACH credit.  Both payment
options require payments to be made one day before the tax
payment due date.

The ACH debit option allows you to pay either by:

   .  Voice response.  Using a touch-tone telephone, you
      call in on an 800 line to an IRS financial agent and
      answer a series of recorded questions by pressing
      numbers on your touch-tone phone;

   .  Voice operator.  You speak directly to an operator
      by telephone to report a tax payment, using a
      reference number for the payment;

   .  Personal computer.  You can use a free software
      program provided by the IRS and a reference or
      verification number, to enter the payment information
      by modem over an analog telephone line.  An
      IBM-compatible computer is required; or

   .  Point-of-sale equipment.  PST terminals of the type
      used in some retail stores can be programmed, using
      instructions provided by the IRS, to make EFT debit
      payments.

The ACH credit option allows you to pay by arranging with
your bank or other financial institution to initiate an ACH
credit to the IRS.

To enroll in Taxlink, request enrollment forms by writing to:

        IRS Atlanta Service Center
        Cash Management Site Office -- Stop 295
        P.O. Box 47669
        Doraville, GA 30362

For additional information on Taxlink, call 1-800-828-5469.

PAYROLL TAX RETURNS
-------------------

By the end of the month following each calendar quarter,
you must also file a payroll tax return, reconciling all
the tax deposits you made during the quarter with wages
paid, and paying up if you made an underpayment.  Most
employers file Form 941 for this purpose.

When a new employee is hired, you must furnish to the
employee a federal Form W-4 which he or she must complete
(filling in Social Security number and the number of
"withholding exemptions" claimed) and return it to you.
You retain the W-4 in your files, and use it to determine
how much income tax to withhold, based on the employee's
income and number of withholding exemptions claimed.

By the end of January at the end of each year, you must
furnish each employee with a copy of Form W-2, Annual Wage
and Tax Statement, which shows the amount of compensation
you paid the employee for the year and the amount of various
taxes (including state income tax, if any) that was withheld
from wages.  By the last day of February, you must file an
original of the W-2's and a summary Form W-3 with the IRS.
Note that if you file 250 or more W-2's and other information
returns, they MUST be filed with the IRS in proper format on
"magnetic media," rather than filing the paper forms.

NONPAYROLL WITHHOLDING
----------------------

In addition to FICA and income tax withholding from wages
that are required of employers, businesses are sometimes
required to withhold income taxes with regard to nonpayroll
payments, such as:

  -  Withholding on certain gambling winnings;

  -  Withholding on annuities, pensions, IRAs, and
     certain other payments of deferred income; and

  -  Backup withholding on certain reportable
     payments, when required by the IRS.

The time for depositing these taxes during 1994 and 1995 was
based on your status as a monthly or semi-weekly depositor
under the payroll tax rules.  However, a "small depositor"
for payroll taxes is treated as a monthly depositor for
nonpayroll taxes withheld.  Beginning in 1996, deposits of
nonpayroll taxes are required monthly if the amount of such
withheld tax in the second preceding year (1994, in the
case of 1996, for example) was $50,000 or less.  Otherwise,
such taxes must generally be deposited on a semi-weekly
basis in 1996 and subsequent years.

Taxpayers required to withhold nonpayroll income taxes must
now report such withholding on IRS Form 945, Annual Return
of Withheld Income Tax, rather than on the Form 941 that
is used to report payroll tax withholding.

@CODE: CA HI LS
@CODE:NF

               @STATE WITHHOLDING REQUIREMENTS

@STATE has withholding requirements fairly similar
to the federal rules for federal income and FICA taxes.
@CODE:OF
@CODE: CA
The California rules apply to withheld California personal
income tax and SDI (State Disability Insurance) withheld
from employees' wages.  Employers in California are required
to register with the Employment Development Department (on
Form DE 1) in order to obtain a state employer identification
number or account number, which must appear on your state
payroll tax returns.

The state provides withholding tables for regular wage
withholding.  Employers are required to withhold a flat
6% of bonuses or other supplemental wages.

California withholding tax requirements, which were
considerably more complex than the federal rules until
recently, have been simplified somewhat in recent years.
The new (1996) requirements are summarized as follows:

____________________________________________________________

   PAYMENT RULE                        WHEN PAYMENT IS DUE
____________________________________________________________

    NEXT BANKING DAY PAYMENTS
         (FORM DE 88)

For certain very large federal        If the amount of state
tax deposits, the federal deposit     tax withheld exceeds
must be made by the next banking      $400, the deposit must
day.  In such instances, the          be remitted by the next
employer may also have to make        banking day.
a California withholding tax
payment.

    EIGHTH-MONTHLY PAYMENTS
         (FORM DE 88*)

Notwithstanding the rules listed      If the amount of state
below, all withheld state income      tax withheld exceeds
tax (SIT) and SDI must be paid        $400, the deposit must
over at the same time as any          must be remitted in the
required federal tax deposit by       same time as required
an employer making eighth-monthly     for the federal tax
(semi-weekly) deposits of federal     deposit (Wednesday for
withholding and FICA taxes.           Wed., Thur., or Friday
                                      payday; by Friday for
                                      other paydays).

    MONTHLY PAYMENTS (FORM DE 88*)

If the employer is required to make   Make payment by the 15th
a monthly deposit of federal taxes    day of the next month.
(income tax and FICA) and the SIT
withheld is more than $400.**

If not required to make federal       Make payment by the 15th
monthly deposits, monthly deposits    day of the next month.
are still required with EDD if
SIT withheld in a month, or the
cumulative total of two or more
months in a quarter, exceeds $350.
(Remit any withheld SDI along with
SIT.)


    QUARTERLY PAYMENTS (FORM DE 6)

Remit all undeposited taxes           File and make payment
with your quarterly report.           on or before the last
                                      day of the month
                                      following the close of
                                      the calendar quarter.

____________________________________________________________

  * NOTE:  Newly registered employers subject to monthly
    and/or eighth-monthly deposits will be mailed a coupon
    book with 26 of the DE 88 payment coupons. It is your
    responsibility to re-order additional coupons before
    you run out of them.  Quarterly payers will only receive
    4 coupons.

  ** This $400 threshold amount went into effect on January
    1, 1996.  It was $500 in 1995.  Previously, the threshold
    amount was $75.  It is adjusted (between $75 and $500)
    each year, beginning in 1996, based on interest rate
    levels.  If the interest rate earned on state investments
    is over 9%, the threshold will be $75; if under 4%, it
    be set at $500, and so forth, at rates between 4% and 9%.
____________________________________________________________

NOTE:  You MAY also remit UI (unemployment insurance) tax
and ETT (employment training tax) at the same time, if
you are required to pay over SDI and PIT more on an
intra-quarterly basis, but you are not required to.  In
any case, UI and ETT must be paid over at the end of each
quarter, along with any undeposited SDI and PIT.

Payments of California employment taxes go directly to
the Employment Development Department and, unlike federal
payroll taxes, are not made via bank deposits.  Payment is
considered made when it is placed in the U.S. mail in a
properly addressed envelope. [Cal. Unemp. Ins. Code Section
13021(h)]  An annual reconciliation of tax withheld (Form
DE-7) is required for most employers, except for certain
firms that elected to remain under the old withholding
requirements for 1995, for whom Form DE 43 must instead be
filed, by February 28th, along with copies of W-2 forms
for all employees.   (For 1996 and future years, all
employers must file DE 7 instead of DE 43, by January 31
of the following year, and you may no longer be required
to file copies of W-2's with the E.D.D.).

Beginning January 1, 1995, some California employers no
longer have to file quarterly payroll tax returns which are
used to reconcile wages and personal income tax withholding
deposits (Form DE 3DP is eliminated).  Instead, a quarterly
payroll report is to be filed (Form DE 6) which shows:

        . employee's name
        . social security number
        . total wages paid
        . total California personal income tax withheld.

Beginning in 1996, the DE 3DP and DE 43 are obsolete.

Note that in April, 1996, E.D.D. began allowing all small
employers with 1-4 employees to provide their employees'
wage information over the telephone, instead of filing Form
DE-6 Quarterly Wage Reports.


CALIFORNIA PARTNERSHIPS.  In addition to wage withholding,
partnerships doing business in California are now generally
required to withhold state income tax, at a rate of 7%, on
distributions made to partners who are not California
residents, which started in 1990.

WARNING:  THERE ARE HEAVY PENALTIES FOR FAILURE TO WITHHOLD!

@CODE:OF
@CODE: HI
The Hawaii state income tax withholding is computed in
accordance with tables and schedules provided by the state
Department of Taxation, in "Booklet A, Employer's Tax
Guide."

Employers who are subject to withholding tax requirements
must register with the Department of Taxation by filing
Form GEW-TA-RV-3 (which also serves as registration for the
General Excise Tax and the Transient Accommodations Tax and
for the Rental and Tour Vehicle Surcharge Tax).  A state
withholding tax ID number is assigned upon filing such a
registration.

Withheld taxes are generally paid to the state monthly, on
the 15th day of the month following the month being reported.
An employer may file on a quarterly basis if total tax
withheld does not exceed $1,000 a year.  Income tax
withholding is reported on a quarterly/monthly reporting
form, Form HW-14.  Employers should obtain a filled out
Form HW-4 (similar to federal W-4) from each employee on
or before the date employment commences.

At the end of each calendar year, on or before January 31,
an employer must give each employee a Form HW-2 (similar to
federal Form W-2, which can be given in lieu of the HW-2,
if desired), showing the amount of state income tax withheld
and the total compensation paid the employee for the
preceding year.  By the last day of February, the employer
must file Form HW-3, Annual Reconciliation Report, together
with copies of all Forms HW-2 (or federal Forms W-2) plus a
list or adding machine tape of the tax withheld as shown by
the withholding statements.

@CODE:OF