Depositing Withheld Taxes This section discusses the rules for depositing income tax withheldon fixed or determinable annual or periodic income. The deposit rulesdiscussed here do not apply to the following items. Tax withheld on pay subject to graduated withholding asdiscussed earlier. (See Form 941 for the deposit rules.) Tax withheld on pensions and annuities subject to graduatedwithholding or the 10% tax on nonperiodic distributions. (See Form 945for the deposit rules.) Tax withheld on a foreign partner's share of effectivelyconnected income of a partnership. See Partnership Withholding onEffectively Connected Income, later. Tax withheld on dispositions of U.S. real property interestsby 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 DepositsAre Required A deposit required for any period occurring in one calendar yearmust be made separately from a deposit for any period occurring inanother calendar year. A deposit of this tax must be made separatelyfrom a deposit of any other type of tax. How much tax you are required to withhold determines the frequencyof your deposits. The following rules show how often deposits must bemade. If at the end of a calendar year the total amount ofundeposited taxes is less than $200, you may either deposit the entireamount or remit it with Form 1042 by the due date of your Form1042. If at the end of any month the total amount of undepositedtaxes is $200 or more but less than $2,000, you must deposit the taxeswithin 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 thenext 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 paiddirectly to the IRS along with your Form 1042 by the due date. If at the end of any quarter-monthly period the total amountof undeposited taxes is $2,000 or more, you must deposit the taxeswithin 3 banking days after the end of the quarter-monthly period. (Aquarter-monthly period ends on the 7th, 15th, 22nd, and last day ofthe month.) In figuring banking days, exclude any local holidaysobserved 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 thedeposit period, and You deposit any underpayment with the first deposit that youmust make after the 15th day of the following month, if thequarter-monthly period is in a month other than December. You mustdeposit any underpayment of $200 or more for a quarter-monthly periodthat occurs during December by January 31. Electronic deposit requirement.If you were required to make deposits by electronic funds transferin prior years, continue to do so in 1999. If you were not previouslyrequired to make electronic deposits and: Your total deposits of social security, Medicare, railroadretirement, and withheld income taxes on wages were more than $50,000in 1997, or You did not deposit any of those taxes, but your totaldeposits of other depository taxes were more than $50,000 in1997, you should make electronic deposits for all depository taxliabilities that occur after 1998. Depository taxes include the incometax withheld on fixed or determinable annual or periodic income. You must use the Electronic Federal Tax Payment System (EFTPS) tomake electronic deposits. You can choose to make deposits using EFTPSeven though you are not required to use it. EFTPS allows you to maketax deposits without coupons, paper checks, or visits to an authorizeddepositary. For information about EFTPS, see Revenue Procedure 97-33,1997-30 Internal Revenue Bulletin. If you are a batch or bulkfiler, also see Revenue Procedure 98-32, 1998-17 InternalRevenue Bulletin. Federal tax deposit coupons.If you do not make electronic deposits, you must deposit the incometax withheld on fixed or determinable annual or periodic income usingForm 8109, Federal Tax Deposit Coupon, according to theinstructions provided with the form. If you don't have your couponswhen 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. dollarsto: Federal Reserve Bank of Philadelphia Attn: Treasury Tax and Loan Unit P.O. Box 44 Philadelphia, PA 19105, USA In order to eliminate possiblelate payment penalty charges, be prepared to show that the payment wasmailed 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 employeridentification number. Apply by completing Form SS-4, availablefrom the IRS. If you have not received the coupon book, you shouldcontact your local IRS office. Record of deposit.Before making a deposit, enter the amount of payment on the couponand in your records. The coupon will not be returned to you, but willbe used to credit your tax account as identified by your employeridentification 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 requireddeposit over any actual timely deposit for a period). You can avoidthe penalty if you can show that the failure to deposit was forreasonable cause and not because of willful neglect. Also, the IRS maywaive 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 theIRS issues the first notice demanding payment, the penalty is 15%. Adjustment for Overwithholding To obtain a refund of tax withheld by graduated withholding onwages, nonresident alien employees must timely file Form 1040NR,U.S. Nonresident Alien Income Tax Return, or Form1040NR-EZ, U.S. Income Tax Return For Certain NonresidentAliens With No Dependents. That tax cannot be refunded by theemployer. To obtain a refund or credit of tax withheld at source on otherincome, the actual owner of the income should timely file Form 1040NRor Form 1040NR-EZ. Or, you may be able to reimburse the ownerfor the overwithheld amount. For example, when you as the withholding agent must withhold $300tax from rents paid to a nonresident alien, and you mistakenlywithhold $320 and mistakenly pay $350 to the IRS, $30 will be creditedor refunded to you and $20 will be credited or refunded to the actualowner of the income. You may recover this overpayment of $30 by adjusting the federaltax deposits if the erroneous withholding occurred during the samecalendar year. Or you may claim it on the Form 1042, which you fileafter the end of the year. This would create an overpaid return thatwould be processed as a claim for refund or credit. If you reimburse the recipient $20 during the same year (beforefiling the Form 1042), you would enter $50 on the line foroverpayments on Form 1042. Overwithholding during a calendar year.If you overwithhold tax during the calendar year, you may use theundeposited amount of tax to make any necessary adjustments betweenyou and the recipient of the income. However, if the undepositedamount is not enough to make any adjustments, or if you discover theoverwithholding after the entire amount of tax has been deposited, youcan make either a reimbursement or repayment to correct theoverwithholding. A reimbursement is a credit of the excesstax previously withheld from a recipient of income against the tax tobe withheld from income later paid to the same recipient. It does nothave to be shown on Form 1042. There can be no reduction of a depositof tax made after filing Form 1042 for the year in which theoverwithholding took place. A repayment is a refunding out of your own funds of theoverwithholding (after its deposit) to the recipient from whose incomethe amount was withheld. It must be shown on Form 1042. You may adjustamounts overwithheld by repayment any time before filing the Form 1042for the year involved. You may make this repayment at any time up tothe due date of Form 1042. If you adjust by repayment, you may adjustaccounts by reducing a later deposit by an amount equal to the amountrepaid to the recipient. You may make this reduction in any depositduring the year of overwithholding or during the year following theyear of overwithholding. Using this method, you report the correct taxliability (the amount that should have been withheld) in theRecord of Federal Tax Liability (lines 1-60) on Form1042 for the period in which the overwithholding occurred. Because thefederal tax deposit for the affected period (line 64) will exceed theamount of the liability reported (line 61c), Form 1042 will show anoverpayment on line 68. You may choose to have the overpaymentrefunded 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 timeM Corporation withheld $30 and paid the balance of $70 to him. OnFebruary 17, 1998, James advised M Corporation that according to theincome tax convention with the United Kingdom, only $15 tax shouldhave been withheld from the $100 dividend and requested repayment ofthe $15 which was erroneously withheld. Although M Corporation hadalready deposited the $30, which was withheld, the corporation repaidJames the $15. During 1997, M Corporation made no other payments from which taxhad to be withheld. On its timely filed 1997 Form 1042, M Corporationincludes $15 in its total tax liability on line 61 and $30 in itstotal deposits on line 64. M Corporation requested that the $15overpayment 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. Form1042-S must accompany the Form 1042 for 1997. No additionalexplanation is needed to be filed with Form 1042 for 1997. During 1998, M Corporation made payments from which it withheld taxof $200, all of which occurred in June of that year. On July 15, 1998,M Corporation deposited $185, that is, $200 less the $15 creditclaimed on its Form 1042 for 1997. M Corporation timely filed its Form1042 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 afterfiling Form 1042 for the year that tax was overwithheld, do not adjustthe amount of tax reported on Forms 1042-S (and Form 1042) or onany deposit or payment for a prior year. If you do not discover the erroneous withholding before the duedate of Form 1042, do not file an amended Form 1042 for the prior taxyear to recover the overpayment or deposit. In this situation, therecipient will have to file a U.S. income tax return (Form 1040NR orForm 1040NR-EZ or Form 1120-F) or, if a tax return hasalready been filed, a claim for refund (amended Form 1040NR or1120-F) to recover the amount overwithheld. The procedure for handling adjustments of overwithheld tax makes iteasier to reconcile the amount of your tax liability with the amountof tax deposited or paid for a calendar year, and prevents a foreignpayee from obtaining a refund from both you and the U.S. Government.Also, this procedure will relieve you from having to refund theoverwithholding out of your own funds after the overwithheld tax hasbeen deposited or paid and Form 1042 filed for the calendar year.