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IRS.gov Website
Publication 515
taxmap/pubs/p515-007.htm#en_us_publink1000225033

Depositing
Withheld Taxes

rule
This section discusses the rules for depositing income tax withheld on FDAP income, including tax withheld pursuant to chapter 4. The deposit rules discussed here do not apply to the following items.
taxmap/pubs/p515-007.htm#en_us_publink1000225034

When Deposits
Are Required

rule
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, but you need not identify whether the deposit is of tax withheld under chapter 3 or 4.
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.
  1. 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 March 15 of the following calendar year.
  2. 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 the 15th day is a Saturday, Sunday, or legal holiday in the District of Columbia, you must deposit the taxes by the next day that is not a Saturday, Sunday, or legal holiday in the District of Columbia. 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 March 15 of the following year.
  3. 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 business 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.) A business day is any day other than a Saturday, Sunday, or legal holiday in the District of Columbia.
taxmap/pubs/p515-007.htm#en_us_publink100015528

Escrow in lieu of deposit.

rule
Under certain circumstances, a withholding agent may be permitted to set aside a withheld amount in escrow rather than depositing the tax. A participating FFI that withholds tax on a withholdable payment not otherwise subject to chapter 3 withholding or backup withholding under section 3406 made to a recalcitrant account holder of a dormant account may, in lieu of depositing the tax withheld, set aside the amount withheld in escrow until the date that the account ceases to be a dormant account. In such case, the tax withheld becomes due 90 days following the date that the account ceases to be a dormant account if the account holder does not provide the required documentation, or becomes refundable to the account holder if the account holder provides documentation establishing that withholding does not apply. A withholding agent that withholds tax under chapter 3 on certain payments that include an undetermined amount of income may retain 30 percent of the payment to hold in escrow in accordance with Treasury regulations section 1.1441-3(d). Similarly, if a withholding agent is unable to determine whether the payment is a withholdable payment because the source or character of the payment is unknown, the withholding agent may retain 30 percent of the payment to hold in escrow for chapter 4 purposes in accordance with Treasury regulations section 1.1471-2(a)(5).
taxmap/pubs/p515-007.htm#en_us_publink1000225035

Electronic deposit requirement.

rule
You must deposit all withheld taxes under chapter 3 or 4 by electronic funds transfer. In most cases, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). If you do not want to use EFTPS, you can arrange for your tax professional, financial institution, or other trusted third party to make deposits on your behalf. Also, you may arrange for your financial institution to initiate a same-day wire payment on your behalf. EFTPS is a free service provided by the Department of Treasury. Services provided by your tax professional, financial institution, or other third party may have a fee. For more information about EFTPS or to enroll in EFTPS, visit www.eftps.gov or call 1-800-555-4477. Additional information about EFTPS is also available in Publication 966, The Secure Way to Pay Your Federal Taxes.
Deposit
Qualified business taxpayers that request an EIN will automatically be enrolled in EFTPS. They will receive information on how to activate their account.
Note. All payments should be stated in U.S. dollars and should be made in U.S. dollars.
taxmap/pubs/p515-007.htm#en_us_publink1000225041

Penalty for failure to make deposits on time.

rule
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_publink1000257090
Depositing on time.
For deposits made by EFTPS to be on time, you must initiate the deposit by 8 p.m. Eastern time the day before the date the deposit is due. If you use a third party to make deposits on your behalf, they may have different cutoff times.
taxmap/pubs/p515-007.htm#en_us_publink1000225042
Penalty rate.
If the deposit is: 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

Adjustment for Overwithholding

rule
What to do if you overwithheld tax depends on when you discover the overwithholding.
taxmap/pubs/p515-007.htm#en_us_publink1000225044

Overwithholding discovered by March 15 of following calendar year.

rule
If you discover that you overwithheld tax under chapter 3 or 4 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 procedure or the set-off procedure to adjust the overwithholding.
Deposit
If March 15 is a Saturday, Sunday, or legal holiday, the next business day is the final date for these actions.
taxmap/pubs/p515-007.htm#en_us_publink1000225046
Reimbursement procedure.
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 the earlier of March 15 of the year after the calendar year in which the amount was overwithheld or the date the Form 1042-S is actually filed with the IRS. For example, if you overwithhold tax in 2014, you must repay the beneficial owner by March 16, 2015 (March 15, 2015, is a Saturday). 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 to the beneficial owner or payee.
If you will reduce a deposit due in the following 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 in accordance with Treasury regulations section 1.6414-1.
taxmap/pubs/p515-007.htm#en_us_publink1000225047
Example.
James Smith is a resident of the United Kingdom. In December 2014, domestic corporation M paid a dividend of $100 to James, at which time M withheld $30 under chapter 3 and paid the balance of $70 to him. In February 2015, 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 2014, M made no other payments from which tax had to be withheld. On its timely filed 2014 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 2015 Form 1042 rather than refunded.
The Form 1042-S that M files for the dividend paid to James in 2014 must show a tax withheld of $30 in boxes 7 and 10 and $15 as an amount repaid in box 11. The Form 1042-S must show an exemption code in box 4a for an exemption from chapter 4 withholding based on the payee's status.
In June 2015, M made payments from which it withheld tax of $200. On July 15, 2015, M deposited $185, that is, $200 less the $15 credit claimed on its Form 1042 for 2014. M timely filed its Form 1042 for 2015, showing tax liability of $200, $185 deposited, and $15 credit from 2014.
taxmap/pubs/p515-007.htm#en_us_publink1000225048
Set-off procedure.
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:
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

Overwithholding discovered at a later date.

rule
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 unless you are a withholding agent for the payment that is a QI, WP, WT, or participating FFI that is eligible to file a collective refund on behalf of one or more of its account holders, partners, beneficiaries, or owners (as applicable). See the applicable agreement of each such entity for details on the requirements for a collective refund.
In this situation (other than a collective refund filed by the withholding agent), the recipient will have to file a U.S. income tax return (Form 1040NR, Form 1040NR-EZ, or Form 1120-F) to claim a refund or credit 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. See Treasury regulations section 1.1474-5 for the specific requirements that apply to obtain a credit or refund of tax actually withheld under chapter 4.