Business Tax Preparation · Advising the business taxpayer

Payments and deposit obligations (e.g., employment tax, excise tax)

Deposits are where an otherwise compliant business gets into serious trouble fastest, because the obligation is continuous, the penalty is a percentage of the amount rather than a fixed sum, and the money involved is largely the employees’. Nothing here depends on whether the annual return is right.

The rule

Federal unemployment tax. 6 percent of total wages paid during the calendar year — an excise tax on the employer for having individuals in its employ, not withheld from the employee^TY2026 (IRC § 3301), on wages capped at $7,000 — wages for FUTA stop at that amount paid to an individual by an employer during the calendar year, so the tax is capped per employee per employer per year^TY2026 (IRC § 3306(b)(1)). The credit that makes the statutory rate misleading: contributions paid into a certified state unemployment fund are credited against the federal tax, but the total credits may not exceed 90 percent of the tax against which they are allowable — bringing a fully credited employer to a net rate of 0.6 percent^TY2026 (IRC § 3302(a)(1) and (c)(1)). And the exception that raises it again: where a state has taken title XII advances that remain outstanding, the credits otherwise allowable to employers subject to that state’s law are reduced — so the net federal rate in a credit reduction state is higher than 0.6 percent and rises with each further year^TY2026 (IRC § 3302(c)(2)).

Which deposit schedule applies. whether an employer is a monthly or a semi-weekly depositor is an annual determination made on the aggregate employment taxes reported for the lookback period — monthly at $50,000 or less, semi-weekly above it^TY2026 (Reg. § 31.6302-1(b)), measured over for a Form 941 filer the lookback period is the twelve months ended the preceding 30 June; for a Form 944 filer, or one who filed Form 944 in either of the two previous years, it is the second calendar year preceding the current one^TY2026 (Reg. § 31.6302-1(b)(4)(i)).

The two schedules. a monthly depositor deposits by electronic funds transfer the employment taxes on payments made during a calendar month by the 15th day of the following month^TY2026 (Reg. § 31.6302-1(c)(1)), and a semi-weekly depositor deposits taxes on Wednesday, Thursday and Friday payments by the following Wednesday, and on Saturday, Sunday, Monday and Tuesday payments by the following Friday — with at least three business days after the close of the period in every case^TY2026 (Reg. § 31.6302-1(c)(2)). Where a deposit date falls on a Saturday, Sunday or District of Columbia legal holiday, IRC § 7503 moves it to the next business day.

The rule that overrides both. $100,000 — if on any day within a deposit period an employer accumulates that amount or more of employment taxes, they must be deposited by electronic funds transfer by the close of the next day, whatever the employer’s ordinary schedule^TY2026 (Reg. § 31.6302-1(c)(3)), and it has a lasting consequence: a monthly depositor caught by the next-day rule ceases to be one on the first day after, becoming a semi-weekly depositor for the rest of that calendar year and for the whole of the next^TY2026 (Reg. § 31.6302-1(b)(2)(ii)).

Relief for very small amounts. $2,500 — accumulated employment taxes below that figure for the return period may be remitted with a timely filed return and are deemed timely deposited, and the same relief follows where the immediately preceding quarter was below it^TY2026 (Reg. § 31.6302-1(f)(4)).

The penalty. 2 percent of the underpayment if the failure is for not more than 5 days, 5 percent for more than 5 but not more than 15 days, and 10 percent beyond 15 days — unless the failure is due to reasonable cause and not to wilful neglect^TY2026 (IRC § 6656(a) and (b)(1)(A)), rising further: the rate rises to 15 percent where the tax is not deposited by the earlier of 10 days after the first delinquency notice under IRC § 6303 or the day of a notice and demand for immediate payment^TY2026 (IRC § 6656(b)(1)(B)). IRC § 6656(c) allows the Secretary to waive the penalty on an inadvertent first-time failure in a taxpayer’s first quarter of being required to deposit.

Current figures

How it works in practice

Status is settled before the year starts. The determination is annual and made on the lookback period, so an employer knows in December which schedule it will be on all through the following year. Growth during the year does not change it — with the one exception that overrides everything.

The next-day rule is the trap. A single day on which accumulated employment taxes reach the threshold forces a deposit by the close of the next day, regardless of schedule. The commonest trigger is not payroll growth but a one-off event: a bonus run, a deferred compensation payout, an option exercise. And the consequence outlives the event, because a monthly depositor caught by it becomes semi-weekly for the remainder of that year and the whole of the next.

The headline FUTA rate is not the rate anyone pays. contributions paid into a certified state unemployment fund are credited against the federal tax, but the total credits may not exceed 90 percent of the tax against which they are allowable — bringing a fully credited employer to a net rate of 0.6 percent^TY2026, so an employer paying its state contributions on time nets down to a fraction of the statutory rate on the capped wage base. Two things disturb that: state contributions paid late, and a credit reduction state, where outstanding federal advances to the state’s unemployment account cut the credit and the net federal rate rises with each further year the advances remain.

Compute FUTA per employer, not per job. The wage base is applied to remuneration paid to an individual by an employer during the calendar year, so an employee who works for two unrelated employers generates a full base at each. A successor employer in certain acquisitions may count the predecessor’s wages; an unrelated one may not.

The deposit penalty is a rate, not a flat amount, and it ratchets by days. Two percent for five days or fewer, five percent through fifteen, ten percent beyond — and fifteen percent once the Service has issued a delinquency notice and ten days have passed. A large payroll deposit missed by three weeks is a ten percent charge on the whole deposit.

Reasonable cause is available and first-time relief exists. IRC § 6656(a) excepts a failure due to reasonable cause and not to wilful neglect, and § 6656(c) allows waiver of an inadvertent failure in the taxpayer’s first quarter of being required to deposit. Neither is automatic and both must be asked for.

Scenarios

Traps

How this has changed

The deposit rules themselves have been stable since the 1990s reorganisation that replaced the old eighth-monthly system with the monthly and semi-weekly schedules and the lookback period. What has changed is the method: paper coupons are gone and Reg. § 31.6302-1(c) now requires deposits by electronic funds transfer, so a deposit “posted” by cheque is not a deposit at all.

The de minimis relief was extended in 2010 to allow an employer whose immediately preceding quarter was below the threshold to remit with the return for the current quarter, which removed a trap for businesses hovering at the boundary. The threshold itself has not been indexed and has not moved.

FUTA’s rate has been unchanged since the temporary surtax expired in 2011, and neither the rate nor the wage base is indexed — the base has stood at the same figure since 1983, so it now covers a small fraction of the wages it once did and FUTA has become in practice a small fixed charge per employee. Credit reduction states have come and gone with the economic cycle, and the reduction schedule remains the main source of year-to-year variation in what an employer actually pays.

Nothing in the post-2024 legislation alters the deposit schedules, the FUTA computation or the IRC § 6656 tiers.

Exam focus

Know the FUTA arithmetic end to end: statutory rate, wage base per employer per year, the state credit and its ceiling, the net rate for a fully credited employer, and that a credit reduction state raises it.

Know both deposit schedules and what fixes them. Monthly at or below the lookback threshold, semi-weekly above it; monthly deposits by the 15th of the following month, semi-weekly on the Wednesday or Friday following the payment period.

The next-day rule is the highest-yield item here. Know the threshold, that it is measured on accumulated taxes on any single day within a deposit period, that it overrides both schedules, and that it converts a monthly depositor to semi-weekly for the rest of that year and all of the next.

Memorise the IRC § 6656 tiers by elapsed days, and know the further rate that applies after a delinquency notice.

Finally, remember that reasonable cause is written into IRC § 6656(a) and that a first-time waiver exists under § 6656(c) — but only for an inadvertent failure in the taxpayer’s first quarter of being required to deposit.

Check yourself

1. An employer reported $46,000 of employment taxes in its lookback period. In March of the current year a single payroll accumulates $103,000 of employment taxes. What must it do, and what is its status for the rest of the year?

Answer: Deposit the accumulated taxes by electronic funds transfer by the close of the next day. The lookback figure made it a monthly depositor, but Reg. § 31.6302-1(c)(3) overrides the schedule once accumulated taxes reach the threshold on any day within a deposit period. Under Reg. § 31.6302-1(b)(2)(ii) it ceases to be a monthly depositor the following day and is a semi-weekly depositor for the remainder of the current calendar year and for the whole of the next — even if payroll returns immediately to its former level.

2. An employer pays an employee $22,000 during the year and pays its state unemployment contributions in full and on time in a state with no credit reduction. What is its FUTA liability for that employee?

Answer: 0.6 percent of $7,000, which is $42. The statutory rate is 6 percent, but IRC § 3306(b)(1) stops the wage base at $7,000 so only that much is taxed however much the employee earns, and IRC § 3302 credits the state contributions against the federal tax up to the statutory ceiling, leaving six-tenths of a percent. Both limbs must be stated — a candidate who applies the net rate to the full $22,000 has remembered the rate and forgotten the base.

3. A semi-weekly depositor pays wages on a Thursday. When is the deposit due, and what happens if the following Wednesday is a legal holiday in the District of Columbia?

Answer: Ordinarily the following Wednesday, since Reg. § 31.6302-1(c)(2)(i) groups Wednesday, Thursday and Friday payments together. If that Wednesday is a Saturday, Sunday or District of Columbia legal holiday, IRC § 7503 and the regulation move the deposit to the next succeeding day that is none of those — so the following Thursday. The regulation also guarantees at least three business days after the close of the semi-weekly period, which is why holidays extend rather than compress the deadline.

4. An employer misses a $60,000 deposit and pays it 20 days late, having received no notice. What is the penalty?

Answer: 10 percent of $60,000, or $6,000, under IRC § 6656(b)(1)(A)(iii), which applies where the failure is for more than 15 days. Had the deposit been made on day five the rate would have been 2 percent and on day fifteen 5 percent, so the same money three weeks earlier would have cost $1,200. The 15 percent rate in § 6656(b)(1)(B) is not in play because no delinquency notice has issued. Reasonable cause under § 6656(a) remains available but has to be established.

5. Why does the next-day rule catch employers who have done nothing unusual with their payroll?

Answer: Because the threshold is measured on accumulated employment taxes on a single day, and that figure includes withheld income tax alongside both halves of FICA — so it is reached at a payroll far smaller than the threshold suggests. A one-off event with a large withholding component, such as a bonus run or an option exercise, can take an otherwise modest employer over it in a day. The employer’s ordinary schedule is irrelevant, and the resulting change of status persists into the following calendar year.