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IRS simplifies rules for payroll tax deposits.

Simplified federal payroll tax deposit rules have been completed and announced by the Internal Revenue Service. The action will streamline the deposit process to eliminate the frequent and irregular deposit schedule required under old IRS rules.

The IRS issued new rules affecting deposits of federal employment taxes by municipalities last week (see September 24,1992 Federal Register 26 CFR Part 31). The new rules take effect January 1, 1993 and apply to the deposit of employment taxes after December 31, 1992. They include a one-year transition period to allow cities to change their payroll systems.

The existing deposit rules are complex and require that cities constantly monitor the amount of accumulated taxes with held from employees' paychecks. In some cases, deposits can be required eight times each month and the deposit schedule can change frequently. The IRS has estimated that 30 percent of all employers required to make deposits were penalized last year for inadequate or late deposits.

Under the new regulations, cities will be required to deposit withheld taxes on either a monthly or semi-weekly basis. The determination of which deposit schedule applies will be made by looking back at the employment taxes reported for the 12-month period between July 1 and June 30 of the prior year. The IRS will tell cities and town by November of each year which schedule they must follow for the coming year.

Cities which reported $50,000 or less in employment taxes will be required to make monthly deposits. Most small municipalities will fall into this category. These deposits will be due by the 15th day of the following month.

Cities with annual employment with holding in excess of $50,000 will be required to deposit semi-weekly. For paydays on Wednesday, Thursday, or Friday, the deposit will be due by the Wednesday after the payday. For all other paydays, the deposit will be due by the Friday following payday.

Whether monthly or semi-weekly, cities will always have at least three banking days after the payday to make the deposit. The IRS noted that all new employers will be monthly depositors.

The regulations also contain special rules and exceptions which carry over from the present rules. Cities accumulating $100,000 during a monthly or semi-weekly period must deposit by the next banking day. Also, small cities or towns accumulating less than $500 during a quarter may skip the deposits altogether and send full payment with their quarterly employment tax returns.

As a safe harbor, an employer who underdeposits will not be penalized if the shortfall is $100 or less than two percent of the amount which should have been deposited.
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Title Annotation:Internal Revenue Service
Author:Shafroth, Frank
Publication:Nation's Cities Weekly
Date:Oct 5, 1992
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