Final Regs on Employment Tax Deposits

 [4830-01]

 ACTION: Final Regulations.

 SUMMARY: This document contains final regulations relating to the deposit of Federal employment taxes (including railroad retirement taxes). These final regulations concern the manner in which an employer computes its deposit liability at the close of a specified deposit period. The regulations also reflect the addition of section 6302(g) to the Internal Revenue Code by the Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, 103 Stat. 2106, accelerating the deposit due date of employment taxes of $100,000 or more, and its amendment by the Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508, 104 Stat. 1388. Guidance concerning the acceleration provisions was previously issued in Notice 90-37, 1990-1 C.B. 343, dated May 21, 1990.

 EFFECTIVE DATES: This document is effective with respect to deposit periods beginning after March 31, 1991.

 FOR FURTHER INFORMATION CONTACT: Vincent G. Surabian, telephone 202-566-5985 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

On Friday, January 4, 1991, the Federal Register published (56 FR 395) proposed amendments to the Employment Tax Regulations (26 CFR Part 31) under section 6302 of the Internal Revenue Code. Written comments responding to the notice were received and a public hearing was held on February 26, 1991.

EXPLANATION OF PROVISIONS

 Currently, the determination of whether there is an obligation to deposit and the amount to be deposited is made with reference to the aggregate amount of undeposited taxes on hand at the close of a deposit period. Under these regulations, a determination of whether an employer has a deposit obligation and the amount thereof would instead be made with reference to the aggregate amount of taxes accumulated with respect to wages paid during a specified deposit period. This change is intended to simplify and clarify the application of the penalty provisions under section 6656 of the Internal Revenue Code, as amended by the Omnibus Budget Reconciliation Act of 1989. It is also intended to prevent employers from making small pre-deposits during a deposit period in order to postpone an otherwise larger deposit obligation that would arise at the close of the deposit period. This practice was permitted under Rev. Rul. 76-561, 1976-2 C.B. 395, which was issued based on language in the regulations in effect prior to these regulations. The regulations therefore render Rev. Rul. 76-561 obsolete, effective for deposit periods beginning after March 31, 1991.

 The regulations also restate the rules set forth in Notice 90-37 regarding the interplay between the statutorily-imposed deposit due dates set forth in section 6302(g) of the Code and the deposit due dates set forth in section 31.6302(c)-1 and section 31.6302(c)-2 of the regulations, and revise these rules to reflect the changes made by the Omnibus Budget Reconciliation Act of 1990.

 Pursuant to the Congressional mandate in section 226 of the Railroad Retirement Solvency Act of 1983 that the times prescribed for making deposits of railroad retirement taxes be the same as the times prescribed for making deposits of FICA and withheld income taxes, these regulations are applicable to railroad retirement taxes as well as to FICA and withheld income taxes. Form CT-1, Employer's Annual Railroad Retirement and Unemployment Repayment Tax Return, sets forth instructions for application of the rule in section 6302(g) of the Code for periods prior to the effective date of these final regulations.

 One commentator objected to the regulations for "eliminating any consideration of overdeposited amounts from prior periods when applying deposit rules to future unpaid liabilities." Under section 31.6302(c)-1(a)(1)(ii)(f), although an overdeposit from one deposit period is credited to the taxpayer's account to satisfy any succeeding deposit obligation within the same return period, the overdeposited amount may not be used to reduce the amount of the aggregate taxes accumulated in the next succeeding deposit period. The taxpayer does of course receive credit for the prior overdeposit in determining the actual amount required to be deposited. As noted above, the regulations are designed to prevent employers from making small pre-deposits during a deposit period in order to postpone an otherwise larger deposit obligation that would arise at the close of the deposit period. If the regulations allowed an overdeposit from a period to reduce the aggregate amount of taxes accumulated in the next period, then employers could accomplish through the use of overdeposits what they cannot accomplish through the use of pre- deposits. Accordingly, the commentator's suggested change to the regulations is not adopted.

 Two commentators suggested that section 31.6302(c)- 1(a)(1)(ii)(f) conflicts with section 1.1461-4 of the Income Tax Regulations and section 35a.9999-3, Q. & A. 39, of the Temporary Employment Tax Regulations. The Service does not believe that the difference between the sections represents a conflict. Rather the difference between the sections reflects a difference between the problem addressed by section 31.6302(c)-1(a)(1)(ii)(f) (i.e., adjustments for true overdeposits) and the problem addressed by section 1.1461-4 and Q. & A. 39 of section 35a.9999-3 (i.e., adjustments to initially correct deposits that resulted from overwithholding). Accordingly, the final regulations do not adopt the commentators' suggestion.

 Another commentator believed the regulations did not allow employers to make pre-deposits and, therefore, the regulations might tempt some employers to divert the funds to other uses. The regulations are not intended to discourage employers from making voluntary deposits of employment taxes. Voluntary deposits may be made but such deposits do not affect the aggregate amount of taxes accumulated with respect to wages paid during a specified deposit period for purposes of determining the deposit obligation for that deposit period.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking for the regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Vincent G. Surabian, Office of the Assistant Chief Counsel (Income Tax and Accounting), Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department have participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 31

 Employment taxes, Gambling, Income taxes, Lotteries, Penalties, Pensions, Railroad retirement, Social security, Unemployment compensation, Withholding.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, title 26, part 31, of the Code of Federal Regulations is amended as follows:

Paragraph 1. The authority for Part 31 continues to read in part:

Authority: 26 U.S.C. 7805 * * *.

Par. 2. Section 31.6302(c)-1 is amended as follows:

1. The heading of paragraph (a) and introductory language in paragraph (a)(l)(i) is revised to read as set forth below.

2. The text of section 31.6302(c)-1(a)(1)(ii) is revised to read as set forth below.

SECTION 31.6302(c)-1 USE OF GOVERNMENT DEPOSITARIES IN CONNECTION WITH TAXES UNDER FEDERAL INSURANCE CONTRIBUTIONS ACT AND INCOME TAX WITHHELD.

(a) REQUIREMENT FOR CALENDAR MONTHS BEGINNING AFTER DECEMBER 31, 1980 -- (1) IN GENERAL. (i) In the case of a calendar month which begins after December 31, 1980, but before April 1, 1991 --

* * * * *

(ii) In the case of a calendar month which begins after March 31, 1991 --

(a) Except as provided in section 31.6302(c)-1(a)(1)(ii)(b) or (c), or section 31.6302(c)-1(b), if with respect to any calendar month the aggregate amount of taxes (as defined in section 31.6302(c)-1(a)(1)(iii)) accumulated with respect to wages paid is $500 or more, but less than $3,000, then the employer shall deposit that aggregate amount in a Federal Reserve bank or authorized financial institution within 15 calendar days after the close of that calendar month. Taxes accumulated with respect to wages paid in a prior calendar month within the same return period shall not be taken into account in determining the aggregate amount of taxes accumulated if a deposit was required to be made under this section with respect to such tax amounts. Deposits made during the calendar month of taxes with respect to wages paid during that month do not reduce the aggregate amount of taxes accumulated for purposes of determining the deposit requirement (if any) for that month.

EXAMPLE 1: Employer A's aggregate amount of taxes accumulated with respect to wages paid in April 1991 is $800. Since that amount is in excess of $500, but less than $3,000, A must deposit the $800 in a Federal Reserve bank or authorized financial institution by May 15, 1991.

EXAMPLE 2: Employer B's aggregate amount of taxes accumulated with respect to wages paid in April 1991 is $400. Since that amount is less than $500, B has no deposit obligation for the month of April. In May 1991 B's aggregate amount of taxes accumulated with respect to wages paid during the month is $450. Since the $400 in taxes in April was not required to be deposited, that amount is taken into account in determining if a deposit is required for May. The aggregate amount of taxes accumulated with respect to wages paid for the two months is in excess of $500, thus requiring a deposit. Since June 15, 1991, is a Saturday, B must deposit the $850 in a Federal Reserve bank or authorized financial institution by Monday, June 17, 1991, pursuant to section 7503 of the Code.

EXAMPLE 3: The facts are the same as in Example 2 except that B deposits the $400 in taxes from April on May 15, 1991. Because the $400 was not required to be deposited, that amount is taken into account in determining if a deposit obligation exists for May. Since the aggregate amount of taxes accumulated with respect to wages paid for the two months, $850, is in excess of $500, a deposit in the aggregate amount of $850 is required by Monday, June 17, 1991. Since $400 was previously deposited, B must deposit an additional $450 by June 17, 1991.

EXAMPLE 4: On Friday, April 5, 1991, a payroll date, Employer C accumulates $450 in taxes with respect to wages paid on that date. Although not required to do so, C deposits the $450 in an authorized depository. On Friday, April 19, 1991, C accumulates an additional $450 in taxes with respect to wages paid. The aggregate amount of taxes accumulated with respect to wages paid during the calendar month is $900. C has a deposit obligation of $900 for the calendar month and must deposit an additional $450 in an authorized depository by May 15, 1991.

(b) Except as provided in section 31.6302(c)-1(a)(1)(ii)(c) or section 31.6302(c)-1(b), and except in the case of first-time 3-banking-day depositors (as defined in section 31.6302(c)- 1(a)(1)(i)(b)(2)), if with respect to any eighth-monthly period (as defined in section 31.6302(c)-1(a)(1)(i)(b)) the aggregate amount of taxes accumulated with respect to wages paid is $3,000 or more, but less than $100,000, the employer shall deposit that aggregate amount in a Federal Reserve bank or authorized financial institution within 3 banking days after the close of that eighth-monthly period. Taxes accumulated with respect to wages paid during a prior eighth-monthly period shall not be taken into account if a deposit was required to be made under this section with respect to such tax amounts. Deposits made during the eighth-monthly period of taxes with respect to wages paid during that eighth-monthly period do not reduce the aggregate amount of taxes accumulated for purposes of determining the deposit requirement (if any) for that eighth-monthly period. Solely for purposes of the examples in this paragraph (a)(1)(ii)(b) and paragraphs (a)(1)(ii)(c), (d), and (f) of this section, "banking days" are assumed to include all calendar days except Saturdays, Sundays, and Federal holidays.

EXAMPLE 1: For the eighth-monthly period April 1-3, 1991, Employer D's aggregate amount of taxes accumulated with respect to wages paid is $3,500. Since that amount is in excess of $3,000, but less than $100,000, D has a deposit obligation of $3,500 that must be satisfied by April 8, 1991, the third banking day after the close of the eighth-monthly period.

EXAMPLE 2: For the eighth-monthly period April 1-3, 1991, Employer E's aggregate amount of taxes accumulated with respect to wages paid is $3,500. E has a deposit obligation of $3,500 that must be satisfied by April 8, 1991, three banking days after the close of the April 1-3 eighth-monthly period. For the eighth-monthly period April 4-7, 1991, E's aggregate amount of taxes accumulated with respect to wages paid is $2,800. Since E was required to make a deposit for the April 1-3 eighth-monthly period, that $3,500 amount is not taken into account in determining any obligations that arise in subsequent eighth- monthly periods. E does not have an eighth-monthly deposit obligation with respect to the April 4-7 period.

EXAMPLE 3: For the eighth-monthly period April 1-3, 1991, Employer F's aggregate amount of taxes accumulated with respect to wages paid is $2,800. Since that amount is less than $3,000, no deposit is required with respect to that eighth-monthly period. For the eighth-monthly period April 4-7, 1991, F's aggregate amount of taxes accumulated with respect to wages paid is $2,500. Since F was not required to deposit the $2,800 in taxes from the April 1-3 eighth-monthly period, that amount is taken into account in determining F's deposit obligation for the April 4-7 eighth-monthly period. The aggregate amount of taxes accumulated for the two eighth-monthly periods is $5,300. F has a deposit obligation of $5,300 that must be satisfied by April 10, 1991, three banking days after the close of the April 4-7 eighth-monthly period.

EXAMPLE 4: The facts are the same as in Example 3 except that F deposits the $2,800 from the April 1-3 eighth-monthly period on April 9, 1991. Because the $2,800 was not required to be deposited, that amount is taken into account in determining F's deposit obligation for the April 4-7 eighth-monthly period. The aggregate amount of taxes accumulated for the two eighth- monthly periods is $5,300. Since that amount is in excess of $3,000, a deposit obligation exists after the close of the April 4-7 eighth-monthly period. As $2,800 of that amount was previously deposited, F has a deposit obligation of $2,500 that must be satisfied by April 10, 1991, three banking days after the close of the April 4-7 eighth-monthly period.

EXAMPLE 5: On Friday, April 12, 1991, the beginning of an eighth-monthly period (April 12-15), G accumulates $3,500 in taxes with respect to wages paid and deposits the $3,500 in an authorized depository on that date although a deposit of the $3,500 was not required to be made on that date. On Monday, April 15, 1991, the end of the April 12-15 eighth-monthly period, G accumulates an additional $2,000 in taxes with respect to wages paid. The aggregate amount of taxes accumulated with respect to wages paid during the April 12-15 eighth-monthly period is $5,500. G has a deposit obligation for the eighth- monthly period of $5,500. Since $3,500 of that amount was previously deposited, G has a remaining deposit obligation of $2,000 that must be satisfied by Thursday, April 18, 1991, three banking days after the close of the eighth-monthly period.

(c) If on any day within an eighth-monthly period the aggregate amount of taxes accumulated with respect to wages paid is $100,000 or more, the employer shall deposit that aggregate amount in a Federal Reserve bank or authorized financial institution on the first banking day after that day. Taxes accumulated with respect to wages paid prior to that day shall not be taken into account if a deposit was required under this section with respect to such tax amounts. Taxes deposited on any given day with respect to wages paid on that day do not reduce the aggregate amount of taxes accumulated on that day for purposes of determining the deposit requirement (if any) for that day.

EXAMPLE 1: On Thursday, April 4, 1991, the beginning of the April 4-7 eighth-monthly period, Employer H accumulates $55,000 in taxes with respect to wages paid on that date. On Saturday, April 6, 1991, H accumulates an additional $50,000 in taxes with respect to wages paid. H has a deposit obligation of $105,000 that must be satisfied by Monday, April 8, the next banking day after Saturday, April 6.

EXAMPLE 2: On Friday, April 12, 1991, the beginning of the April 12-15 eighth-monthly period, J accumulates $60,000 in taxes with respect to wages paid and deposits the $60,000 in an authorized depository on that date although a deposit of the $60,000 was not required to be made on that date. On Monday, April 15, 1991, the last day in the April 12-15 eighth-monthly period, J accumulates an additional $50,000 in taxes with respect to wages paid. On Monday, April 15, the aggregate amount of taxes accumulated with respect to wages paid during the eighth-monthly period to date totals $110,000. J has a $110,000 deposit obligation that must be satisfied by the next banking day after the $100,000 threshold is reached. Since $60,000 of the $110,000 was already deposited, J has a remaining deposit obligation of $50,000 that must be satisfied by Tuesday, April 16, 1991, the next banking day following April 15th.

EXAMPLE 3: On Monday, April 1, 1991, Employer K accumulates $105,000 in taxes with respect to wages paid on that date. On that same day, K deposits in an authorized depository $10,000 of the $105,000 accumulated. K has a $105,000 deposit obligation that must be satisfied by the next banking day, April 2, 1991. The $10,000 deposited on April 1 cannot be used to reduce the aggregate amount of accumulated taxes with respect to that date. K has a remaining deposit obligation of $95,000 that must be satisfied by April 2, 1991.

(d) If, with respect to any eighth-monthly period, an employer incurs an obligation to deposit in accordance with section 31.6302(c)-1(a)(1)(ii)(c), and later, within the same eighth-monthly period, accumulates with respect to wages paid taxes of $3,000 or more, but less than $100,000, an additional deposit is required in accordance with section 31.6302(c)-1(a)(1)(ii)(b). However, if the amount of taxes is $100,000 or more, an additional deposit is required in accordance with section 31.6302(c)-1(a)(1)(ii)(c).

EXAMPLE: On Tuesday, April 2, 1991, Employer L accumulates $110,000 in aggregate taxes with respect to wages paid. In accordance with paragraph (a)(1)(ii)(c) of this section, L has a $110,000 deposit obligation that must be satisfied by Wednesday, April 3, 1991, the next banking day following April 2. On Wednesday, April 3, 1991, L accumulates an additional $10,000 in taxes with respect to wages paid that date. In accordance with paragraph (a)(1)(ii)(b) of this section, L now has an additional deposit obligation of $10,000 that must be satisfied by Monday, April 8, 1991, the 3rd banking day following the close of the April 1-3 eighth-monthly period. The obligation to deposit the $10,000 is separate and distinct from the obligation to deposit the $110,000.

(e) An employer will be considered to have satisfied the deposit obligation imposed by paragraphs (a)(1)(ii)(b), (c) and (d) of this section if --

(1) The deposit that is made is not less than 95 percent of the aggregate amount of taxes accumulated with respect to wages paid during the period for which the deposit is made, and

(2) If the eighth-monthly period (or, in the case of a deposit required under paragraph (a)(1)(ii)(c) of this section, the day on which the obligation arose) is in a month other than the last month of the return period, the employer deposits any remaining amount due with the first deposit otherwise required to be made after the fifteenth day of the following month. In the case of the last month of the return period, see section 31.6302(c)-1(a)(1)(iv).

(f) Any excess of a deposit over the actual taxes required to be deposited to date (overdeposit) during the return period shall be applied in order of time to each of the employer's succeeding deposit obligations within the same return period. In the determination of the aggregate amount of taxes accumulated with respect to wages paid in succeeding deposit periods, the overdeposit does not reduce the aggregate amount accumulated although the overdeposit is credited to the depositor's account.

EXAMPLE: Employer M's deposit obligation for the eighth- monthly period April 1-3, 1991, is $3,200. On April 8, 1991, three banking days after the close of the eighth-monthly period, M deposits $4,000 in an authorized depository, $800 in excess of the amount required to be deposited. During the eighth-monthly period April 4-7, 1991, M accumulates $3,750 in taxes with respect to wages paid during such period. Although the $800 overdeposit for the April 1-3 eighth-monthly period is credited to M's account, it may not be used to determine whether a deposit obligation exists for the April 4-7 eighth-monthly period. The two deposit obligations are separate and distinct. Since the amount of taxes accumulated with respect to the April 4-7 eighth-monthly period is an amount greater than $3,000, a deposit is required under paragraph (a)(1)(ii)(b) of this section within three banking days after the close of the period. M has a remaining deposit obligation of $2,950 ($3,750 accumulated less $800 overdeposit) that must be satisfied by April 10, 1991, three banking days after the close of the period.

(g) The periods within which taxes must be deposited under this section are determined, in the case of employers paying advance earned income credit amounts, by reference to the amount of taxes required to be deposited after reduction for advance amounts paid to employees.

(h) For purposes of this paragraph (a)(1)(ii), the term "wages paid" includes all amounts included in wages, e.g., under section 3121(v) of the Code, regardless of whether they have actually been paid.

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Par. 3. Section 31.6302(c)-2 is amended as follows:

1. The heading of paragraph (a)(1) of section 31.6302(c)-2 is revised to read as set forth below.

2. In the first sentence of paragraph (a)(1), the language "after December 31, 1983," is removed in the three places it appears and the language "after December 31, 1983, and before April 1, 1991," is added in its place.

3. Section 31.6302(c)-2(a)(2) is revised to read as set forth below.

SECTION 31.6302(c)-2 USE OF GOVERNMENT DEPOSITARIES IN CONNECTION WITH EMPLOYEE AND EMPLOYER TAXES UNDER RAILROAD RETIREMENT TAX ACT.

(a) REQUIREMENT -- (1) IN GENERAL: AFTER 1983 AND BEFORE APRIL 1991. * * *

(2) IN GENERAL; AFTER MARCH 31, 1991. In the case of a calendar month which begins after March 31, 1991, if, at a time prescribed under section 31.6302(c)-1(a)(1)(ii) or (v) for the deposit of accumulated taxes, the aggregate amount of accumulated employee tax withheld after March 31, 1991, under section 3202 and employer tax imposed after March 31, 1991, under section 3221(a) and (b) equals an amount required to be deposited under section 31.6302(c)-1(a)(1)(ii) or (v), the employer shall deposit the accumulated railroad retirement taxes described in sections 3202 and 3221 at the time and in the manner prescribed in section 31.6302(c)- 1(a)(1)(ii) or (v) (except that accumulated railroad retirement taxes described in section 3221(c) shall in no case be required to be deposited earlier than the first day on which a deposit is otherwise required by section 31.6302(c)-1(a)(1)(ii) to be made after the 15th day of the month following the month in which the section 3221(c) tax arises). Notwithstanding the preceding sentence, and notwithstanding section 31.6302(c)-1(a)(1)(v), if, for the calendar year prior to the calendar year preceding the current calendar year, the aggregate amount of taxes imposed under sections 3202 and 3221 with respect to an employer equalled or exceeded $1 million, such employer shall deposit the aggregate amount of railroad retirement taxes required to be deposited for the current calendar year in accordance with Revenue Procedure 83-90, 1983-2 C.B. 615 (relating to transfers by wire to the Treasury).

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Par. 4. In the second sentence of paragraph (b)(2) of section 31.6302(c)-2, the language "paragraph (a)(1)" is removed and the language "paragraph (a)(1) or (a)(2) of this section" is added in its place.