Electronic Transfer of Funds

April 13, 2006

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Medium and large employers must (and smaller employers may) make their income tax withholding deposits through the IRS's Electronic Federal Tax Payment System (EFTPS). If a taxpayer deposits more than $200,000 in payroll taxes, the taxpayer must use EFTPS for depository taxes that are required to be made for return periods beginning after December 31 of the following year, and must continue to deposit by electronic funds transfer in all succeeding years.

For example, if a taxpayer exceeds the $200,000 deposit threshold during 2005, it is required to make deposits for return periods beginning in or after calendar year 2007 by electronic funds transfer. This obligation continues even if the taxpayer never again exceeds $200,000 in future years.

Work Smart

Don't get stuck paying the 10 percent penalty associated with failing to make required electronic fund transfers.

The $200,000 total includes all withheld income taxes, FICA taxes, social security, Medicare, and railroad retirement taxes you pay. If your payroll taxes are less than the limit, participation in this program is voluntary.

Did You Know?

By way of background, prior to July 1, 1997, only employers with $47 million or more in annual payroll taxes were required to make electronic deposits. However, as part of the North American Free-Trade Agreement (NAFTA), the IRS was directed to collect more funds electronically. By July of 1997, 1.2 million employers were required to use the Electronic Federal Tax Payment System, or EFTPS.

The first step, for those who will be participating in the program, is to enroll with the IRS. Call 1-800-945-8400 or 1-800-555-4477 to receive the enrollment form.

Starting January 1, 2004, new businesses receiving a new employer identification number (EIN) that have a federal tax obligation will be automatically pre-enrolled in EFTPS to make all federal tax deposits. In addition to their EIN, taxpayers will also receive a separate mailing containing an EFTPS personal identification number and instructions for activating their enrollment. New business taxpayers will activate their enrollment by calling a toll-free telephone number, entering banking information, and completing an authorization for EFTPS to transfer funds to a Treasury Department account for tax payments.

Otherwise, once you are enrolled, here's a rundown of the basic procedures you will use to make your transfers:

You have two choices for making the wire transfer. Under the first choice, you'll instruct one of the government's banking agents to transfer funds from your account to the government's account. The process is begun by calling either a toll-free number, or using your personal computer (either bank will send you software if you prefer this option). You'll give the agent both your taxpayer's identification number and a special personal identification number you will have been given for verification. The agent bank will then instruct your bank to withdraw funds from your account and send it to the government's account.
Under the second choice, you'll instruct your own bank directly to withdraw funds from your account for transfer to the Treasury Department's account. You should be aware, however, that this choice is only open to you if your bank offers this service. Depending on the bank, you'll use your phone, computer, or either to initiate the transfer.
You won't be charged any fees by the government, its agents, or the IRS for their services, but you may be charged fees by your own bank for the services it provides you. Make sure that you talk to your banker before reaching any decisions about which option to choose.

Warning

Make sure you keep good records of your wire transfers. You want to be prepared in the event that the system malfunctions and proof of your transfer is lost. Your own bank's records of your withdrawals will be your best evidence, but there are still two additional steps you should take. First, if you use one of the agent banks, make sure that you get an acknowledgment number from the bank with each transfer. Second, each time you authorize a withdrawal, write down the time, date, and amount and keep this with your payroll tax records.