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Depositing Withheld Taxes This section discusses the rules for depositing income tax withheld on fixed or determinable annual or periodic income. The deposit rules discussed here do not apply to the following items. Tax withheld 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. Additional U.S. tax withheld by Canadian withholding agents. They should pay the additional tax with their annual Form 1042. When Deposits Are Required 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. How much 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 deposit the entire amount or remit it with Form 1042 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 paid directly to the IRS along 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. Electronic deposit requirement. If you were required to make deposits by electronic funds transfer in prior years, continue to do so in 1999. If you were not previously required to make electronic deposits and: Your total deposits of social security, Medicare, railroad retirement, and withheld income taxes on wages were more than $50,000 in 1997, or You did not deposit any of those taxes, but your total deposits of other depository taxes were more than $50,000 in 1997, you should make electronic deposits for all depository tax liabilities that occur after 1998. Depository taxes include the income tax withheld on fixed or determinable annual or periodic income. You must use the Electronic Federal Tax Payment System (EFTPS) to make electronic deposits. You can choose to make deposits using EFTPS even though you are not required to use it. EFTPS allows you to make tax deposits without coupons, paper checks, or visits to an authorized depositary. For information about EFTPS, see Revenue Procedure 97-33, 1997-30 Internal Revenue Bulletin. If you are a batch or bulk filer, also see Revenue Procedure 98-32, 1998-17 Internal Revenue Bulletin. Federal tax deposit coupons. 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 don't have your coupons when a deposit is due, contact your local IRS office. Deposits made by foreign corporations. If you use a Form 8109, show the "Amount of Deposit" in U.S. dollars. Send the completed coupon with a bank draft in U.S. dollars to: Federal Reserve Bank of Philadelphia Attn: Treasury Tax and Loan Unit P.O. Box 44 Philadelphia, PA 19105, USA In order to eliminate possible late payment penalty charges, be prepared to show that the payment was mailed by the second day before the due date. Obtaining coupon book. A preinscribed book of Federal Tax Deposit Coupons (Form 8109) automatically will be sent to you after you apply for an employer identification number. Apply by completing Form SS-4, available from the IRS. If you have not received the coupon book, you should contact your local IRS office. Record of deposit. Before making a deposit, enter the amount of payment on the coupon and in your records. The coupon will not be returned to you, but will be used to credit your tax account as identified by your employer identification number. Penalty for failure to make deposits on time. 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 for certain first-time depositors. Penalty rate. If the deposit is: 1 to 5 days late, the penalty is 2%, 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%. Adjustment for Overwithholding To obtain a refund of tax withheld by graduated withholding on wages, nonresident alien employees must timely file Form 1040NR, U.S. Nonresident Alien Income Tax Return, or Form 1040NR-EZ, U.S. Income Tax Return For Certain Nonresident Aliens With No Dependents. That tax cannot be refunded by the employer. To obtain a refund or credit of tax withheld at source on other income, the actual owner of the income should timely file Form 1040NR or Form 1040NR-EZ. Or, you may be able to reimburse the owner for the overwithheld amount. For example, when you as the withholding agent must withhold $300 tax from rents paid to a nonresident alien, and you mistakenly withhold $320 and mistakenly pay $350 to the IRS, $30 will be credited or refunded to you and $20 will be credited or refunded to the actual owner of the income. You may recover this overpayment of $30 by adjusting the federal tax deposits if the erroneous withholding occurred during the same calendar year. Or you may claim it on the Form 1042, which you file after the end of the year. This would create an overpaid return that would be processed as a claim for refund or credit. If you reimburse the recipient $20 during the same year (before filing the Form 1042), you would enter $50 on the line for overpayments on Form 1042. Overwithholding during a calendar year. If you overwithhold tax during the 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 make either a reimbursement or repayment to correct the overwithholding. A reimbursement is a credit of the excess tax previously withheld from a recipient of income against the tax to be withheld from income later paid to the same recipient. It does not have to be shown on Form 1042. There can be no reduction of a deposit of tax made after filing Form 1042 for the year in which the overwithholding took place. A repayment is a refunding out of your own funds of the overwithholding (after its deposit) to the recipient from whose income the amount was withheld. It must be shown on Form 1042. You may adjust amounts overwithheld by repayment any time before filing the Form 1042 for the year involved. You may make this repayment at any time up to the due date of Form 1042. If you adjust by repayment, you may adjust accounts by reducing a later deposit by an amount equal to the amount repaid to the recipient. You may make this reduction in any deposit during the year of overwithholding or during the year following the year of overwithholding. Using this method, you report the correct tax liability (the amount that should have been withheld) in the Record of Federal Tax Liability (lines 1-60) on Form 1042 for the period in which the overwithholding occurred. Because the federal tax deposit for the affected period (line 64) will exceed the amount of the liability reported (line 61c), Form 1042 will show an overpayment on line 68. You may choose to have the overpayment refunded to you or apply it to the following year. Example. James Smith is a resident of the United Kingdom. In December 1997, domestic corporation M paid a dividend of $100 to James, at which time M Corporation withheld $30 and paid the balance of $70 to him. On February 17, 1998, James advised M Corporation that according to the income tax convention with the United Kingdom, only $15 tax should have been withheld from the $100 dividend and requested repayment of the $15 which was erroneously withheld. Although M Corporation had already deposited the $30, which was withheld, the corporation repaid James the $15. During 1997, M Corporation made no other payments from which tax had to be withheld. On its timely filed 1997 Form 1042, M Corporation includes $15 in its total tax liability on line 61 and $30 in its total deposits on line 64. M Corporation requested that the $15 overpayment be credited to its 1998 Form 1042 rather than refunded. The Form 1042-S that M Corporation files for the dividend of $100 paid to James in 1997 must show net tax withheld of $15. Form 1042-S must accompany the Form 1042 for 1997. No additional explanation is needed to be filed with Form 1042 for 1997. During 1998, M Corporation made payments from which it withheld tax of $200, all of which occurred in June of that year. On July 15, 1998, M Corporation deposited $185, that is, $200 less the $15 credit claimed on its Form 1042 for 1997. M Corporation timely filed its Form 1042 for 1998, showing tax liability of $200, $185 deposited, and the $15 credit from 1997. Overwithholding discovered in later year. If you discover after the close of the calendar year and after filing Form 1042 for the year that tax was overwithheld, do not adjust the amount of tax reported on Forms 1042-S (and Form 1042) or on any deposit or payment for a prior year. If you do not discover the erroneous withholding before the due date of Form 1042, do not file an amended Form 1042 for the prior tax year to recover the overpayment or deposit. 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 (amended Form 1040NR or 1120-F) to recover the amount overwithheld. The procedure for handling adjustments of overwithheld tax makes it easier to reconcile the amount of your tax liability with the amount of tax deposited or paid for a calendar year, and prevents a foreign payee from obtaining a refund from both you and the U.S. Government. Also, this procedure will relieve you from having to refund the overwithholding out of your own funds after the overwithheld tax has been deposited or paid and Form 1042 filed for the calendar year.

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