Congress enacted legislation a number of years ago 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). Traditionally, employers have used a paper coupon and a check to make federal tax deposits (FTDs). EFTPS eliminates most of the paperwork in the old FTD coupon system. With EFTPS, deposits may be made by telephone or personal computer, or through the financial institution of the employer.
The new electronic system is being phased in over a period of years by increasing the percentage of total taxes subject to the new EFTPS system each year. Congress mandated that 94 percent of employment taxes be collected electronically in 1999. The IRS previously assumed that this meant that employers with $50,000 or more in payroll tax deposits would have to deposit payroll taxes electronically. As a result, employers with $50,000 or more in payroll tax deposits for 1997 were required to begin depositing payroll taxes electronically by January 1, 1999.
Key point. The IRS announced in 1998 that it would not assess any penalty for failure to comply with the EFTPS system until July 1, 1999 for an employer with at least $50,000 in payroll tax deposits for 1997 that continues to deposit payroll taxes using paper forms. IRS Announcement IR-98-68.
Recent experience has demonstrated that the 94 percent requirement can be met by increasing the $50,000 threshold to $200,000. As a result, the IRS has issued important new regulations that contain the following provisions that will be of interest to church treasurers:
Employers (including churches) do not need to deposit payroll taxes electronically unless they deposited payroll taxes of $200,000 or more in 1998. This is up from the $50,000 threshold that was scheduled to apply this year. Payroll taxes include withheld FICA and income taxes, as well as the employer’s share of FICA taxes. Employers that exceed the $200,000 threshold in a future year will be required to deposit payroll taxes electronically following a one-year grace period. If an employer’s deposits drop below $200,000 in a future year, it will not be allowed to revert back to making manual deposits at a local bank.
The higher threshold will apply to deposits made on or after January 1, 2000. The IRS has announced that it will waive penalties for employers with $50,000 or more in payroll tax deposits that continue to deposit manually through the end of 1999. However, the IRS is reminding employers eligible for the penalty relief that deposits must still be made on time even when using paper coupons or they risk a late deposit penalty.
A “Fresh Start”
Employers that have been making electronic deposits in anticipation of the $50,000 threshold will be allowed to revert to depositing payroll taxes manually at a bank if they do not meet the new $200,000 threshold for 1998. The IRS estimates that 65 percent of employers that would have met a $50,000 threshold will not meet the $200,000 threshold. The IRS estimates that 91 percent of all employers make less than $200,000 in payroll tax deposits. These are the employers that now can voluntarily deposit their payroll taxes electronically.
Voluntary Compliance Expected
The IRS is assuming that most employers who are not required to deposit electronically will realize the simplicity and convenience of doing so, and will voluntarily comply.
The IRS commissioner recently noted that the large number of employers who have voluntarily begun depositing payroll taxes electronically means that “most businesses can voluntarily participate.” However, he also expressed confidence that “most of the employers that are currently using the system will continue to do so because they find it easier to use.”
The President and CEO of the National Association for the Self-Employed recently observed: “The new $200,000 threshold shows that IRS has listened to small employers’ concerns on this issue, and we appreciate it. While electronic payment of taxes is increasingly popular due to its speed and convenience, the decision to raise the threshold requiring the use of EFTPS shows understanding and flexibility for the needs of smaller employers.”
Need more information? For information on EFTPS or to get an enrollment form, call EFTPS Customer Service at (800) 555-4477 or (800) 945-8400. Employers can begin using EFTPS as soon as they receive their payment instruction packet and personal identification number.
Here are some examples that will assist you in understanding the new rules:
Example. A church employs four persons—a minister, office secretary, bookkeeper, and custodian. In 1998, the church deposited payroll taxes of $15,000. The church is not required to deposit payroll taxes electronically.
Example. Same facts as the previous example. The church treasurer decides that depositing payroll taxes electronically would be easier, and she would like to do so. Can the church voluntarily deposit payroll taxes electronically using the EFTPS system, even though it deposited only $15,000 of payroll taxes in 1998? Yes, it may.
Example. A church has 20 employees. Over the past few years, it has been depositing payroll taxes of about $75,000 per year. Since deposits exceeded $50,000, the church treasurer began depositing payroll taxes electronically in 1998 in anticipation of being required to do so under the old rules. Under the new rules, the church has the following two options. First, it can continue to deposit payroll taxes electronically. Second, it can revert to depositing payroll taxes manually at a bank—assuming that it did not meet the new $200,000 threshold for 1998.
Example. A church has 15 employees. Over the past few years, it has been depositing payroll taxes of about $60,000 per year. The church decides not to voluntarily switch to electronic deposits in 1999, and continues making deposits manually at a local bank. The IRS has announced that a church with $50,000 or more of payroll tax deposits in 1998 will not be subject to any penalties for continuing to deposit payroll taxes manually. Under the old rules, this church would have been subject to penalties for not switching to electronic deposits by July 1, 1999.
Example. A church has 75 employees. In 1998 it deposited payroll taxes of $215,000. This church must begin depositing payroll taxes electronically no later than January 1, 2000. It will not be subject to penalties for continuing to deposit taxes manually up to that date.
Example. Same facts as the previous example. Assume that the church deposits payroll taxes of $220,000 in 2000, and $185,000 in 2001. Since its deposits dropped below $200,000 for 2001, can it revert to manual deposits in 2002? The new regulations clarify that once an employer has $200,000 in payroll tax deposits for 1998 or any future year, it must begin depositing payroll taxes electronically and cannot revert to manual deposits in a later year if its deposits drop below $200,000.
Example. A church manually deposits payroll taxes of $150,000 in 1998, and also in 1999 and 2000. In the year 2001 it deposits $210,000. The new regulations specify that the church has a one-year “grace period” to convert over to electronic deposits. This means that it can continue to deposit payroll taxes manually in 2002 if it chooses to do so.