This section discusses the rules for depositing income tax withheld on FDAP income. The deposit rules discussed here do not apply to the following items.
- Taxes on pay subject to graduated withholding as discussed earlier. (See Form 941 for the deposit rules.)
- Tax withheld on pensions and annuities subject to graduated withholding or the 10% tax on nonperiodic distributions. (See Form 945 for the deposit rules.)
- Tax withheld on a foreign partner's share of effectively connected income of a partnership. See Partnership Withholding on Effectively Connected Income, later.
- Tax withheld on dispositions of U.S. real property interests by foreign persons. See U.S. Real Property Interest, later.
- Taxes on household employee. See Schedule H (Form 1040), Household Employment Taxes, to report social security and Medicare taxes, and any income tax withheld, on wages paid to a nonresident alien household employee.
A deposit required for any period occurring in one calendar year must be made separately from a deposit for any period occurring in another calendar year. A deposit of this tax must be made separately from a deposit of any other type of tax.
The amount of tax you are required to withhold determines the frequency of your deposits. The following rules show how often deposits must be made.
- If at the end of a calendar year the total amount of undeposited taxes is less than $200, you may either pay the taxes with your Form 1042 or deposit the entire amount by the due date of your Form 1042.
- If at the end of any month the total amount of undeposited taxes is $200 or more but less than $2,000, you must deposit the taxes within 15 days after the end of the month. If you made a deposit of $2,000 or more during the month (except December) under rule 3 below, carry over any end of the month balance of less than $2,000 to the next month. If you made a deposit of $2,000 or more during December, any end of December balance of less than $2,000 should be remitted with your Form 1042 by the due date.
- If at the end of any quarter-monthly period the total amount of undeposited taxes is $2,000 or more, you must deposit the taxes within 3 banking days after the end of the quarter-monthly period. (A quarter-monthly period ends on the 7th, 15th, 22nd, and last day of the month.) In figuring banking days, exclude any local holidays observed by authorized financial institutions, as well as Saturdays, Sundays, and legal holidays.
You are considered to meet the deposit requirements in (3) if:
- You deposit at least 90% of the actual tax liability for the deposit period, and
- You deposit any underpayment with the first deposit that you must make after the 15th day of the following month, if the quarter-monthly period is in a month other than December. You must deposit any underpayment of $200 or more for a quarter-monthly period that occurs during December by January 31.
You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits of all depository tax liabilities you incur after 2009, if you meet either of the following conditions.
- You had to make electronic deposits in 2009.
- You deposited more than $200,000 in federal depository taxes in 2008.
If you do not meet these conditions, you may choose to make electronic deposits.
To participate in EFTPS, you must first enroll. To receive an enrollment form, call 1-800-316-6541 (individual), 1-800-555-4477 (business), or you can enroll online at www.eftps.gov. Get Publication 966, The Secure Way to Pay Your Federal Taxes, for more information.
Qualified business taxpayers that request an EIN will automatically be enrolled in EFTPS. They will receive information on how to activate their account or get federal deposit coupons, discussed next.
If you do not make electronic deposits, you must deposit the income tax withheld on fixed or determinable annual or periodic income using Form 8109, Federal Tax Deposit Coupon, according to the instructions provided with the form. If you do not have your coupons when a deposit is due, call 1-800-829-4933 or contact your local IRS office.
To eliminate any penalty for failure to make deposits on time, be prepared to show that the deposit was mailed by the second day before the due date.
If you prefer, you may mail your coupon and payment to:
Federal Tax Deposit Processing
P.O. Box 970030
St. Louis, MO 63197
Make your check or money order payable to "Financial Agent."
The Financial Agent cannot process foreign checks. If you send a check written on a foreign bank to pay a federal tax deposit, you generally will be charged a deposit penalty and will receive a bill in the mail. A foreign bank is a financial institution that is not incorporated under the laws of the United States, any U.S. state, any U.S. possession, or the District of Columbia.
The "Amount of Deposit" on the form should be stated in U.S. dollars and all payments should be made in U.S. dollars.
A preinscribed book of Federal Tax Deposit Coupons (Form 8109) automatically will be sent to you after you apply for an employer identification number (EIN). Apply by completing Form SS-4, available from the IRS. If you have not received the coupon book, call 1-800-829-4933.
If you are a qualified business taxpayer, you will automatically be enrolled in EFTPS (discussed earlier) when you apply for your EIN. You will receive information on how to get your coupons.
Record of deposit. Before making a deposit, enter the amount of payment on the coupon and in your records.
If you fail to make a required deposit within the time prescribed, a penalty is imposed on the underpayment (the excess of the required deposit over any actual timely deposit for a period). You can avoid the penalty if you can show that the failure to deposit was for reasonable cause and not because of willful neglect. Also, the IRS may waive the penalty if certain requirements are met. taxmap/pubs/p515-007.htm#en_us_publink1000225042
If the deposit is:
- 1 to 5 days late, the penalty is 2% of the underpayment,
- 6 to 15 days late, the penalty is 5%, or
- 16 or more days late, the penalty is 10%.
However, if the deposit is not made within 10 days after the IRS issues the first notice demanding payment, the penalty is 15%.
If you owe a penalty for failing to deposit tax for more than one deposit period, and you make a deposit, your deposit is applied to the most recent period to which the deposit relates unless you designate the deposit period or periods to which your deposit is to be applied. You can make this designation only during a 90 day period that begins on the date of the penalty notice. The notice contains instructions on how to make this designation. taxmap/pubs/p515-007.htm#en_us_publink1000225043
What to do if you overwithheld tax depends on when you discover the overwithholding.taxmap/pubs/p515-007.htm#en_us_publink1000225044
If you discover that you overwithheld tax by March 15 of the following calendar year, you may use the undeposited amount of tax to make any necessary adjustments between you and the recipient of the income. However, if the undeposited amount is not enough to make any adjustments, or if you discover the overwithholding after the entire amount of tax has been deposited, you can use either the reimbursement or the set-off procedure to adjust the overwithholding.
If March 15 is a Saturday, Sunday, or legal holiday, the next business day is the final date for these actions.
Under the reimbursement procedure, you repay the beneficial owner or payee the amount overwithheld. You use your own funds for this repayment. You must make the repayment by March 15 of the year after the calendar year in which the amount was overwithheld. For example, if you overwithhold tax in 2010, you must repay the beneficial owner by March 15, 2011. You must keep a receipt showing the date and amount of the repayment and provide a copy of the receipt to the beneficial owner.
You may reimburse yourself by reducing any subsequent deposits you make before the end of the year after the calendar year in which the amount was overwithheld. The reduction cannot be more than the amount you actually repaid.
If you will reduce a deposit due in that later year, you must show the total tax withheld and the amount actually repaid on a timely filed (not including extensions) Form 1042-S for the calendar year in which the amount was overwithheld. You must state on a timely filed (not including extensions) Form 1042 that you are claiming a credit.taxmap/pubs/p515-007.htm#en_us_publink1000225047
James Smith is a resident of the United Kingdom. In December 2010, domestic corporation M paid a dividend of $100 to James, at which time M withheld $30 and paid the balance of $70 to him. In February 2011, James gave M a valid Form W-8BEN. He advises M that under the income tax convention with the United Kingdom, only $15 should have been withheld from the dividend and requests repayment of the $15 overwithheld. Although M Corporation had already deposited the $30, the corporation repaid James $15 before the end of February.
During 2010, M made no other payments from which tax had to be withheld. On its timely filed 2010 Form 1042, M reports $15 as its total tax liability and $30 as its total deposits. M requests that the $15 overpayment be credited to its 2011 Form 1042 rather than refunded.
The Form 1042-S that M files for the dividend paid to James in 2010 must show a tax withheld of $30 in boxes 7 and 9 and $15 as an amount repaid in box 10.
In June 2011, M made payments from which it withheld tax of $200. On July 15, 2011, M deposited $185, that is, $200 less the $15 credit claimed on its Form 1042 for 2010. M timely filed its Form 1042 for 2011, showing tax liability of $200, $185 deposited, and $15 credit from 2010. taxmap/pubs/p515-007.htm#en_us_publink1000225048
Under the set-off procedure, you repay the beneficial owner or payee the amount overwithheld by reducing the amount you would have been required to withhold on later payments you make to that person. These later payments must be made before the earlier of:
- The date you actually file Form 1042-S for the calendar year in which the amount was overwithheld, or
- March 15 of the year after the calendar year in which the amount was overwithheld.
On Form 1042 and Form 1042-S for the calendar year in which the amount was overwithheld, show the reduced amount as the amount required to be withheld.taxmap/pubs/p515-007.htm#en_us_publink1000225049
If you discover after March 15 of the following calendar year that you overwithheld tax for the prior year, do not adjust the amount of tax reported on Forms 1042-S (and Form 1042) or on any deposit or payment for that prior year. Do not repay the beneficial owner or payee the amount overwithheld.
In this situation, the recipient will have to file a U.S. income tax return (Form 1040NR or Form 1040NR-EZ or Form 1120-F) or, if a tax return has already been filed, a claim for refund (Form 1040X or amended Form 1120-F) to recover the amount overwithheld.