IRS Notice 931: Deposit Requirements for Employment Taxes

What Is IRS Notice 931: Deposit Requirements for Employment Taxes?

IRS Notice 931: Deposit Requirements for Employment Taxes is an annually updated instruction booklet published by the Internal Revenue Service (IRS). It tells employers how to deposit the money they withhold from their employees' paychecks for Social Security, Medicare, and income taxes. IRS Notice 931 does not cover the rules for federal unemployment tax (FUTA) deposits.

Understanding IRS Notice 931

IRS Notice 931 provides instructions for employers regarding how and when they must make federal tax deposits for the Social Security, Medicare, and federal income taxes they have withheld from their employees' pay.

Employers generally report their withholding each quarter using IRS Form 941, Employer's Quarterly Federal Tax Return. (Some small employers, with annual employment tax liabilities of $1,000 or less, only have to report annually, using Form 944, while agricultural employers may use yet another form, Form 943.)

Tax withholding of this kind is a common feature of tax codes around the world since any system that relied on employees to make their own tax payments throughout the year would inevitably result in missed payments and expensive collection efforts by the government.

Making employers responsible for the tax withholding process allows governments to receive at least a rough approximation of the tax revenue they will be due for the year and to receive it in periodic installments rather than all at once.

In the U.S., employers must furnish an IRS Form W-2, Wage and Tax Statement to their regular employees by Jan. 31 of each year. Among other information, it shows how much the employer withheld from their pay to cover federal, state, and local taxes during the calendar year just ended.

When employees file their federal income tax returns for the year, typically by April 15, they may find that they owe more or less than the amounts that their employer withheld. If they owe more, they must make up the difference. If they owe less, they are due a refund from the government.

Deposit Schedules Described in Notice 931

Notice 931 explains that employers must use one of two employment tax deposit schedules: semiweekly or monthly. Which schedule to use depends on the amount of tax liability they reported during what the IRS calls their lookback period.

The lookback period is four calendar-year quarters beginning on July 1 of the year preceding the previous year. For example, the lookback period for withholding taxes to be collected in 2024 begins on July 1, 2022, and ends on June 30, 2023.

Employers use the monthly deposit schedule if their total tax liability in the lookback period was $50,000 or less. Their payment is due on the 15^th day of the month after the month in which the paychecks were issued.

Employers use the semiweekly schedule if their total tax liability was over $50,000. In that case, payments are due on the Wednesday following payroll days falling on Wednesday, Thursday, or Friday; or on the Friday following payroll days falling on Sunday, Saturday, Monday, or Tuesday.

For a new employer, income for the lookback period is considered to be zero. Thus new companies automatically fall under the monthly payment schedule for the first year, so long as their tax liability on any one day doesn't exceed $100,000 (see the next section).

The $100,000 Rule

The so-called $100,000 Rule in Notice 931 says that if any employer accumulates $100,000 or more in tax liability on any day during a deposit period, payment is due to the IRS on the next business day. Moreover, if the employer had been on a monthly deposit schedule, it must immediately switch to the semiweekly schedule for the rest of the year and the following calendar year.

How Employers Must Make Deposits

As Notice 931 explains, employers must now make all of their federal withholding deposits through electronic funds transfer (EFT), typically via the Electronic Federal Tax Payment System (EFTPS), a free service provided by the Treasury Department.

However, Notice 931 says, "If you don't want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make electronic deposits on your behalf. Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf."

The Bottom Line

The federal government assigns employers the task of withholding enough money from their employees' pay to cover their tax obligations for the year. Employers are also required to deposit that money with the government. Notice 931 provides an overview of employers' responsibilities and the relevant deadlines.