Payroll taxes are trust fund money. The employer withholds income tax and the employee share of Social Security and Medicare, holds it, and has to move it to the Treasury on a fixed schedule. Late deposits are one of the most common and most avoidable penalty sources for small clients, and they are the first place a CPA firm should look when a client has cash flow stress. This article explains the deposit rules in the IRS employment tax guidance and the reconciliation steps that catch failures early.
Two schedules
The IRS states that there are two deposit schedules, monthly and semiweekly, and that the employer must be on one of them. Publication 15 sets the test, called the lookback period. An employer that reported $50,000 or less of taxes in the lookback period is a monthly depositor, and one that reported more than $50,000 is a semiweekly depositor. For Form 941 filers in 2026 the lookback period is the four quarters from July 1, 2024 through June 30, 2025. Form 944 filers use calendar year 2024. Confirm the schedule against Publication 15 each year rather than carrying it forward unchecked.
Monthly depositors
Monthly depositors deposit by the 15th of the following month. Taxes on January wages are due by February 15, and so on. If the 15th falls on a weekend or legal holiday, the next business day applies.
Semiweekly depositors
Semiweekly depositors deposit on one of two days depending on the payday:
- Wages paid on Wednesday, Thursday or Friday: deposit by the following Wednesday.
- Wages paid on Saturday, Sunday, Monday or Tuesday: deposit by the following Friday.
Payments made on Saturday, Sunday, Monday or Tuesday are deposited by the following Friday. The deposit date follows the payday, not the pay period end. A client that pays on Friday and a client that pays on Monday will have different deposit dates even if both run weekly payroll.
The $100,000 next-day rule
If a business accumulates $100,000 or more in taxes on any day during a deposit period, it must deposit by the next business day. The rule applies regardless of the monthly or semiweekly schedule. For most small clients it will not be triggered. For a client with a large bonus run or a large one-time payment, it can be. Under Publication 15, a monthly depositor that reaches $100,000 becomes a semiweekly depositor on the next day and remains one for at least the rest of that calendar year and the following calendar year. Set a payroll checkpoint before any unusually large run.
Electronic deposit
The IRS requires federal tax deposits to be made by electronic funds transfer. Free options include a business tax account, Direct Pay for businesses and EFTPS. Fee-based options include an ACH credit through a bank, a payment by a third party such as a tax professional or payroll service, and a same-day tax wire. The IRS notes that EFTPS payments must be scheduled by 8 p.m. ET at least one calendar day before the due date. A deposit scheduled on the due date itself through EFTPS is late.
When a third party deposits for the client, the client remains responsible. A payroll provider that fails to remit does not remove the employer's liability. Confirm with the client that confirmations of deposits are received and filed.
Small liabilities paid with the return
Publication 15 lets an employer pay with a timely filed Form 941, instead of depositing, when the Form 941 total tax liability for either the current quarter or the prior quarter is less than $2,500 and the $100,000 next-day rule was not triggered in the current quarter.
FUTA deposits
Federal unemployment tax follows a different rule. If the quarterly FUTA liability is more than $500, the employer deposits the full amount by the last day of the first month after the quarter ends. If it is $500 or less, the amount carries to the next quarter. For the fourth quarter, an amount of $500 or less can be paid with the Form 940 by its due date. The Form 940 for 2026 is due February 1, 2027 because January 31, 2027 is a Sunday, with ten additional calendar days if all FUTA deposits were timely. See the 2026 due date calendar for the actual dates.
Form 941 and Form 944
Form 941 is the quarterly return for employers who withhold federal income tax or Social Security and Medicare taxes. Form 944 is an annual return, available only to employers the IRS has notified in writing that they are in the Form 944 program. The 941 is due on the last day of the month following the quarter, which makes the third quarter 2026 return due November 2, 2026 because October 31 is a Saturday. Ten extra calendar days are allowed when all taxes were deposited on time. That grace period does not extend deposit deadlines.
Quarterly reconciliation procedure
A firm that handles payroll compliance, or that audits a client with payroll, should run these checks every quarter:
- Payroll register to general ledger. Total gross wages, employee withholdings and employer taxes in the payroll register should tie to the payroll expense and liability accounts.
- Liability account rollforward. Opening balance plus accruals less deposits should equal the closing balance. A liability that grows quarter after quarter is an undeposited liability.
- Deposits to bank statements. Match each EFT to a withdrawal and to a tax period. Unapplied or misapplied deposits show up as IRS notices later.
- Deposits to the Form 941. Total deposits for the quarter should agree to the deposit schedule reported on the return. Discrepancies point to late or missing deposits.
- Wages to the W-2. Quarterly 941 wages should sum to the annual W-2 totals. See W-2 and 1099 filing.
Why this matters to an audit
An unrecorded or undeposited payroll tax liability is a classic unrecorded liability, and unpaid trust fund taxes can be a going-concern signal. Audit teams test payroll liabilities against filed returns and subsequent deposits. The search for unrecorded liabilities is explained in search for unrecorded liabilities.
Client onboarding checklist
- Ask which schedule the client is on and request the last four deposit confirmations.
- Request the filed 2025 Forms 941 and 940 and compare them to the general ledger.
- Confirm who initiates deposits and who reviews confirmations.
- Identify unusual payments, such as bonuses and owner draws coded as wages, that can change deposit timing.
- Confirm the payroll provider's role in writing.
FAQ
Can a client switch between monthly and semiweekly?
The schedule is determined by the rules in Publication 15, so the employer's own preference does not control it.
What if a deposit is a day late?
Penalties and interest can apply, and the IRS notices that result take time to resolve. Use the schedule and cutoff times above to prevent it.
Does the 941 grace period extend deposits?
No. The ten extra days apply to filing the return when all deposits were made on time.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- IRS, Depositing and reporting employment taxes: https://www.irs.gov/businesses/small-businesses-self-employed/depositing-and-reporting-employment-taxes
- IRS, Employment tax due dates: https://www.irs.gov/businesses/small-businesses-self-employed/employment-tax-due-dates
- IRS, Tax calendar: https://www.irs.gov/businesses/small-businesses-self-employed/tax-calendar
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error