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What is the Accelerated Deposit Rule?
The Accelerated Deposit Rule says that if the employment taxes of an employer total $100,000 or more in one business day, the tax withholdings must be deposited in a tax withholding account or paid to the IRS the next day. If an employer triggers this rule, it must establish bi-weekly deposits for the next two years of operations.
A Little More on The Accelerated Deposit Rule
Typically, federal employment tax or labor tax is paid by an employer according to the employer’s federal annual/quarterly income tax return. Also, there is often a schedule for the payment of this tax, this might be monthly or quarterly as the case may be.
The amount of employment tax payable by an individual is stipulated in Form 941 or 944, with certain requirements and rules backing up the payments. For both Forms 941 and 944, the tax liability for a year that an employer can submit is less than $2,500. The tax obligation in the fourth quarter for From 944 is also less than $ 2,500.
However, once an employer accumulates federal employment taxes of $100,000 or more in a day, the accelerated deposit rule mandates the remittance of such amount into the bank the next banking day.
Form 941 has a review period of 12 months covering the quarters of the previous year while Form 944 also conducts a revision of the previous year. According to the accelerated deposits rule, deposits are to be made at least every two weeks after the $100,000 has been paid in the following banking day. After this, payment will be made at least every two weeks for the next two years.
Monthly plan contributors make payment for the labor tax for a specific month which is to be deposited in the next business day. For example, if an employer is to make payment for March 5 to April 5 and the 5th of april is a Saturday, Sunday or a public holiday, payment will be made in the next business or banking day. This is for payers that have their review period less than $500.
When the taxes are however more than $50,000 in a reporting period, payment will be made every two weeks.
Payments of labor or employment taxes are to be made promptly by 8Pm EST before the expiration date of the deposit. Payments are done electronically through EFTPS (Electronic Federal Tax System). For employers who do not use EFTPS, trusted third party service providers can be used such as tax experts and financial institutions.
In cases whereby an employer is unable to make deposit with EFTPS at 8 pm ESt the day before the deposit expiration date, the Federal Tax Office (FTC) can be used for payment the same day. Financial institutions or third party often charge fees for paying on behalf of an employer.
References for Accelerated Deposit Rule
Academic Research for Accelerated Deposit Rule
Regulations Address Deposit of Federal Taxes by EFT, Thalman, J. A. (1996). Regulations Address Deposit of Federal Taxes by EFT. Taxes, 74, 290.
Federal tax deposit requirements, Pugan, E., & Corrigan, J. (1982). Federal tax deposit requirements. The CPA Journal (pre-1986), 52(000010), 56.
FICA tax refund guidelines, Pugan, E., & Corrigan, J. (1982). FICA tax refund guidelines. The CPA Journal (pre-1986), 52(000010), 55.
Beware the increasing complexities of payroll, Merens, M. (1991). Beware the increasing complexities of payroll. Strategic Finance, 73(4), 42.
Saving taxes by avoiding penalties–part 1, Kaminsky, M. L. (1980). Saving taxes by avoiding penalties–part 1. The CPA Journal (pre-1986), 50(000009), 78.