@144 CHAP 5 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� � WITHHOLDING OF INCOME TAXES � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� @Q "If you want a picture of the future, imagine @Q a boot stamping on a human face forever." @Q -- George Orwell (in an eerily prescient @Q reference to IRS SWAT teams of today) @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 gov- ernment 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 busi- ness, unless you will be a sole proprietor with no em- ployees, is to file a Form SS-4 with the I.R.S., request- ing 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 fed- eral tax deposits can be briefly summarized as follows: ____________________________________________________________ NEW (1993) "SIMPLIFIED" TAX DEPOSIT RULES: ____________________________________________________________ Beginning in 1993, the federal employment tax deposit rules are considerably simplified, as follows: All employers are considered to be either "monthly" or "semi- weekly" depositors. You will be considered a "monthly depo- sitor" 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 un- deposited 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 ques- tion, Wednesday-Friday or Saturday-Tuesday.) Once an em- ployer 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. The old, more complex, tax deposit rules described below may still be followed in calendar year 1993, if an employer chooses to do so. This flexibility is intended to give em- ployers a whole year, if necessary, to change over their payroll systems to the new simplified schedule. The old (pre-'93) rules are summarized as follows: ____________________________________________________________ AMOUNT OF UNDEPOSITED TAXES DEPOSIT WITH BANK BY ____________________________________________________________ Less than $500 at the end of Last day of the following a calendar quarter month (or can mail in the payment with Form 941 re- turn) $500 or more, but less than 15th day of the following $3,000 undeposited at end of month any eighth-monthly period (a period ending on the 3rd, 7th, 11th, 15th, 19th, 22nd, 25th, or last day of any month) $3,000 or more undeposited at 3rd banking day after the the end of an eighth-monthly end of the eighth-monthly period period in which undepos- ited taxes reach $3,000 $100,000 undeposited (any time) 1st banking day following At least 95% of the tax due must be deposited when required each month, for an employer making eighth-monthly deposits, to avoid penalty. For a more detailed explanation of feder- al tax deposits, including the new rules, obtain a copy of the IRS's "Notice 109." ____________________________________________________________ Under both the old and 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. 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 em- ployee a federal Form W-4 which he or she must complete (filling in Social Security number and the number of "with- holding 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 in- come and number of withholding exemptions claimed. By the end of January af 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 vari- ous 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. @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 person- al income tax and SDI (State Disability Insurance) with- held from employees' wages. Employers in California are required to register with the Employment Development Department (on Form DE 1, a copy of which is included in "STARTING & OPERATING A BUSINESS IN CALIFORNIA," if you have the book) in order to obtain a state employer ident- ification number or account number that 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 for 1992 and subsequent years. The new requirements are summarized as follows: ____________________________________________________________ PAYMENT RULE WHEN PAYMENT IS DUE ____________________________________________________________ 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 $75, the deposit must over at the same time as any re- must be remitted in the quired federal tax deposit by an same time as required employer making eighth-monthly for the federal tax de- deposits of federal withholding posit (generally three and FICA taxes. banking days). MONTHLY PAYMENTS (FORM DE 88*) If the employer is required to make Make payment within the a monthly deposit of federal taxes same number of days as (income tax and FICA) and the SIT is required for federal withheld is more than $75. purposes. 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 $75. (Remit any withheld SDI along with SIT.) QUARTERLY PAYMENTS (FORM DE 3DP) Remit all undeposited taxes File and make payment with your quarterly report. on or before the last day of the month fol- lowing 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 DE88 payment coupons. It is your responsibility to re-order additional coupons before your run out of them. ____________________________________________________________ Payments of California employment taxes go directly to the Employment Development Department and, unlike federal pay- roll 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 Income Tax Withheld" (Form DE 43) is due by February 28, after the end of each year, along with copies of W-2 forms for all employees. 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 resi- dents, which started in 1990. THIS IS A NEW REQUIREMENT, WITH HEAVY PENALTIES FOR FAILURE TO WITHHOLD! @CODE:OF @CODE: HI The Hawaii state income tax withholding is computed in ac- cordance 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 re- ported. 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 with- held 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 @CODE: LS In @STATE, employers who fail to pay over withheld wages are likely to receive suspended sentences -- from a gibbet. @CODE:OF