Operating a successful salon or spa with employees requires not only the skills to create cutting-edge styles and develop dazzling dyes but also to keep your finances as sleek and polished as your clients' hair. Federal tax deposit requirements are one of many important concepts a successful employer needs to know to maintain a thriving business and will be today's focus.

Unwrapping Federal Tax Deposits Foil by Foil

Employers are responsible for properly calculating and withholding FICA (Federal Insurance Contributions Act) taxes and remitting both the employee and employer portions to the IRS (Internal Revenue Service). In addition, employers are responsible for paying FUTA (Federal Unemployment Tax Act) on their employees' wages.

Employers must report FICA and FUTA taxes to the IRS on time using the appropriate forms. Employers are also responsible for depositing FICA and FUTA taxes to the IRS on time.

Importantly, deposit due dates for taxes and reporting due dates of taxes often differ. Even more noteworthy, the FICA deposit and filing due dates and FUTA deposit and filing due dates also often vary. Solely depositing taxes owed does not report the taxes or relieve employers of the requirement to file a return.

The various due dates can lead even the most diligent employers astray. However, understanding the different due dates and meeting with a tax professional to create a plan will streamline the process and help you avoid unnecessary penalties and interest.

What are FICA and FUTA?

1. FICA is comprised of Social Security and Medicare taxes. Employers and employees contribute to FICA, each paying 6.2% for Social Security (up to a wage base limit) and 1.45% for Medicare as of 2024 (with no wage base limit). For high-income earners, there is an additional 0.9% Medicare tax. FICA funds crucial social programs that provide retirement, disability, and health benefits for millions of Americans.

   1. Reporting: FICA taxes may be reported on Form 941, Form 945, and less commonly, Form 943 or Form 944.

2. FUTA is paid solely by employers. It funds the federal government's oversight of each state's unemployment insurance program. The standard FUTA tax rate is 6% on the first $7,000 of each employee's wages. However, most employers receive up to 5.4% credit for paying state unemployment taxes, potentially reducing the effective FUTA rate to 0.6%. Unlike FICA, FUTA does not provide direct benefits to employees but supports the unemployment system as a whole.

   1. Reporting: FUTA is reported on Form 940.

When and How to Make Federal Tax Deposits: Keeping Your Finances Trimmed

Your tax deposit frequency for the upcoming calendar year depends on your total employment tax reported on Form 941, Form 945, Form 943, and Form 944 during the specified lookback period. The lookback period is different based on the form type. If you only filed Form 941, the lookback period is 12 months, starting July 1st of the second preceding year and ending on June 30th of the prior year.

The IRS requires employers to deposit employment taxes on specific schedules:

1. Monthly Schedule: For employers with a Form 941 tax liability of $50,000 or less during the lookback period.

   • Deposit by the 15th of the following month.

   • If you are a new employer, your taxes in the lookback period are zero for any quarter before you acquired your business. During the first year of business, you are a monthly depositor unless the $100,000 next-day deposit rule applies.

2. Semi-weekly Schedule: Employers with a Form 941 tax liability exceeding $50,000 during the lookback period.

   • Deposit on Wednesdays or Fridays semi-weekly, depending on payroll dates.

3. $100,000 next-day deposit rule: Regardless of whether you're a monthly schedule depositor or a semiweekly schedule depositor, if you accumulate taxes of $100,000 or more on any day during a deposit period, you must deposit the taxes by the next business day. Additionally, for the remainder of the calendar year and for the following calendar year, you must deposit using a semi-weekly schedule.

Employers must make all federal tax deposits using electronic funds transfer (EFT). The Department of Treasury provides a free EFT service, the Electronic Federal Tax Payment System (EFTPS). For the EFTPS deposit to be on time, it must be scheduled by 8 p.m. Eastern time the day before it is due.

If you miss the timely deposit timeframe, you can still make your deposit using the Federal Tax Collection Service (FTCS) for a same-day payment. Note that this method requires your financial institution’s cooperation.

Employers are responsible for depositing 100% of their tax liability by the deposit due date. If you deposit late, deposit less than the required amount, or mail payments directly to the IRS instead of using the EFT, you can incur penalties. 

Avoiding Tangles: Penalties for Non-Compliance

Failing to file forms or deposit taxes accurately and timely can result in significant penalties:

• Failure-to-File Penalty: Up to 25% of unpaid tax

• Failure-to-Pay Penalty: Up to 25% of unpaid tax

• Failure-to-Deposit Penalty: 2% to 15% of unpaid tax, depending on lateness

  • 1-5 Days Late: 2% of late payroll deposits

  • 5-16 Days Late: 10% of late payroll deposits

  • 16+ Days Late: 10% if you pay within ten days of the IRS’ first notice, OR

  • 16+ Days Late: 15% if you pay ten or more days after the date of the IRS’ first notice

Remember, these penalties can stack and accrue interest. Currently, the annual IRS interest rate is 8% to 10%, depending on taxpayer type.

Smoothing Out Tax Troubles: Collection Alternatives and Penalty Relief

If you are unable to pay your existing IRS liabilities and if you meet certain criteria, you may be able to avail yourself of one of many collection alternatives, such as:

• Offer in Compromise: You can settle your tax liability for less.

  • Types:

    • Doubt as to Collectibility

    • Doubt as to Collectibility (With Special Circumstances)

    • Doubt as to Liability

    • Effective Tax Administration

• Installment Agreement: You pay your tax liability in monthly amounts over an extended period.

• Currently Not Collectible Status: The IRS determines that you cannot pay any of your tax debt and temporarily delays collection until your financial condition improves.

A business with unpaid tax liabilities in collection status and no agreed-to collection alternative is subject to IRS enforcement action. The IRS can levy (seize) your assets or wages and file a notice of federal tax lien.

In addition to the collection alternatives above, you can also request penalty relief through penalty abatement. If successful, penalty abatement will remove penalties and reduce or remove any related interest. There are two types of penalty abatement:

• Reasonable Cause Penalty Abatement: The taxpayer must demonstrate that they exercised ordinary care and prudence yet could not file a return or pay the tax on time.

• First-Time Penalty Abatement: The taxpayer must have had no penalties assessed in the three years before the period for which abatement is being requested. Further, the Taxpayer cannot have previously availed themselves of abatement.

Penalties that may be eligible for abatement include: (1) Information Return; (2) Failure-to-File; (3) Failure-to-Pay; (4) Accuracy-Related; (5) Failure-to-Deposit; (6) Dishonored Check; (7); Underpayment of Estimated Tax by Corporations; and (8) Underpayment of Estimated Tax by Individuals.

Styling Your Success

For salon and spa employers, mastering federal tax deposits and reporting requirements is essential for maintaining a successful business. By understanding the types of taxes involved, knowing which forms to file and when, and adhering to deposit schedules, you can ensure compliance and avoid costly penalties.

Do you have an IRS balance that needs resolution? Contact Azarvand Tax Law at (410) 698-4005 or book a free consultation online at AzarvandTaxLaw.com.