Software of the Month Club 1997 March

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@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 (Form 9779, Business Enrollment Form) 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. For information on the Electronic Federal Tax Payment System (EFTPS), contact the EFTPS Customer Service Center between the hours of 8:30 AM and 8:00 PM Eastern Standard Time at: 1-800-945-8400 (English) 1-800-945-8600 (Spanish) 1-800-945-8900 (TDD) 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