Depositing Payroll Taxes Electronically

What church treasurers need to know about the new EFTPS system.

Background. Beginning on July 1, 1997, some churches must begin depositing their federal payroll taxes electronically. Failure to do so may result in penalties. This article will help church treasurers understand the new rules, and determine whether or not they will apply to their church.

Depositing payroll taxes—how often? If your church has at least one nonminister employee (or a minister who has elected voluntary withholding), then you should be accumulating three kinds of federal payroll taxes:

  • income taxes withheld from employees’ wages
  • employees’ share of FICA taxes (withheld from employees’ wages), and
  • the employer’s share of FICA taxes.

Most churches deposit withheld payroll taxes on a monthly or semiweekly basis, depending on the amount of taxes reported in a four quarter “lookback” period. For 1997 the lookback period is July 1, 1995 through June 30, 1996. Churches that reported payroll taxes of $50,000 or less in the lookback period deposit their withheld taxes for 1997 on a monthly basis. This means that payroll taxes withheld during each calendar month, along with the employer’s share of FICA taxes, must be deposited by the 15th day of the following month. Churches that reported payroll taxes of more than $50,000 in the lookback period must deposit their withheld taxes on a semiweekly basis. This means that for paydays falling on Wednesday, Thursday, or Friday, the payroll taxes must be deposited on or by the following Wednesday. For all other paydays, the payroll taxes must be deposited on the Friday following the payday.

Key point. Churches accumulating less than $500 in withheld payroll taxes during a calendar quarter may skip the deposit requirements altogether and send the taxes in to the IRS with their quarterly 941 forms.

Depositing payroll taxes—how and with whom? Churches use Form 8109 (Tax Deposit Coupon) to deposit employment taxes. The taxes may be deposited at any financial institution qualified to act as a depository for federal taxes or to the federal reserve bank serving your geographical area. Checks are made payable to the depository where you make the deposit. Deposits are timely if delivered on or before the deadline, or mailed on or before the second day before the due date.

Depositing payroll taxes—the new rules. In 1993 Congress enacted legislation requiring the IRS to develop a system for the electronic filing of payroll taxes. Congress wanted a simple, “paperless” way for employers to deposit their payroll taxes. In response the IRS came up with the Electronic Federal Tax Payment System (or EFTPS). The new electronic system is phased in over a period of years by increasing the percentage of total taxes subject to the new EFTPS system each year. For 1994, 3 percent of all payroll taxes were required to be made by electronic fund transfer. This percentage increased to 20 percent for 1996, and 58 percent for 1997. Implementation began with the largest depositors of employment taxes. For 1997, the target percentage will be achieved by requiring all employers that deposited more than $50,000 in payroll taxes in 1995 to begin using EFTPS by July 1, 1997.

Key point. If you had a federal payroll tax obligation of more than $50,000 for 1995, you must use the EFTPS system to deposit payroll taxes not later than July 1, 1997. There are no exceptions for churches or other religious or charitable organizations.

Example. A church had 2 ministers and 4 nonminister employees in 1995. The ministers were treated as employees, but did not elect voluntary withholding of their federal income taxes. The church had a federal payroll tax obligation of $20,000. It does not have to begin using the EFTPS system to deposit payroll taxes in 1997.

Example. A church had 3 ministers and 8 nonminister employees in 1995. The ministers were treated as employees, and elected voluntary withholding of payroll taxes. The church had a federal payroll tax obligation of $55,000. It must begin using the EFTPS program to deposit payroll taxes no later than July 1, 1997.

Payroll taxes are deposited electronically with a government account maintained by either First National Bank of Chicago or NationsBank. It is not necessary for a church to open an account with either bank. The banks never receive a church’s deposit. Rather, all deposits flow directly from the church’s bank account to the federal government’s account with either of these two banks. The IRS selected these banks to enroll employers with the EFTPS program, provide customer service, direct deposits to the government’s account, and provide tax payment information to the IRS.

How the EFTPS system works. How does a church deposit its payroll taxes using the EFTPS program? Simply follow these steps:

  • Order IRS Form 9770. If the IRS did not mail you an enrollment form (Form 9770), you can order one by calling either First National Bank of Chicago (1-800-945-8400) or NationsBank (1-800-555-4477).
  • Complete and submit Form 9770. Complete Form 9779 and mail it to the address provided in the form’s instructions.

It will take 2-10 weeks to process an enrollment application. So if your church is required to begin using the EFTPS program by July 1, 1997, be sure to submit your enrollment form as soon as possible.

Need more help? Call either bank and ask for the customer service department.

Using the “ACH debit option” to transfer your payroll taxes. Once you have established an account with either First National Bank of Chicago or NationsBank, you transfer payroll taxes from your own bank account to the government’s account at either bank that you select. You can do this in any one of the following three ways:

  • call the customer service department of First National Bank of Chicago or NationsBank
  • use an automated touchstone telephone system offered by both banks
  • use your own personal computer (call either bank to obtain Windows-based software to enable you to use this option)

Whichever option you select, you are using what is called the “ACH debit option” to deposit your taxes. “ACH” refers to the Automated Clearing House. It is a financial network run by the Federal Reserve Board to transfer funds electronically. ACH is widely used by banks to deposit wages and social security payments in personal bank accounts.

Be sure to transfer the correct amount. You must transfer the same amount of payroll taxes that you would have deposited with a bank under the prior rules. In other words, you compute your payroll tax obligations the same way. You are simply using a different method of depositing them. You must be able to establish that you had sufficient funds in your bank account to cover the transfer of payroll taxes to the government’s account. If you can’t, you may have to pay a penalty.

Tips for church treasurers. If your church had a federal payroll tax obligation of more than $50,000 in 1995, you will have to begin using the EFTPS program to deposit your payroll taxes by July 1, 1997. If your church deposited payroll taxes of less than this amount in 1995, you will continue to physically deposit your taxes with a bank using Form 8109.

Key point. No fees will be charged by the IRS, or either First Bank of Chicago or NationsBank, for using the EFTPS program. However, your local bank may charge a fee.

Key point. Most employers are not covered by the new rules. The IRS estimates that only 1.2 million employers out of a total of 5.2 million employers with federal payroll tax obligations will be required to use the EFTPS program.

This article originally appeared in Church Treasurer Alert, May 1997.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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