Employment and Training Administration
Washington, D. C. 20210






September 29, 2000















Office of Workforce Security




Timely Deposits of Federal Income Taxes Withheld from Unemployment Insurance (UI) Benefits

  1. Purpose. To provide State Employment Security Agencies (SESAs) with information regarding timely deposits of Federal income taxes withheld from UI benefits.

  2. References.  UIPL 10-99; UIPL 32-96; UIPL 17-95 and UIPL 17-95, Change 1; Section 702 of Public Law (P. L.) 103-465; Section 11, Depositing Taxes, Internal Revenue Service (IRS) Publication 15 (Rev. January 2000), Circular E, Employer's Tax Guide; IRS Form 945, Annual Return of Withheld Federal Income Tax; IRS Form 945-A, Annual Record of Federal Tax Liability; and Section 6656 (a), Underpayment of Deposits, Internal Revenue Code; OMB Circular A-87, Section 20. Fines and penalties.

  3. Background. The General Agreement on Tariffs and Trade (GATT) required States to offer claimants the option of having Federal income taxes withheld from their UI benefits beginning on January 1, 1997. Along with the withholding of taxes came the State responsibility for making timely deposits to the IRS of progressively larger amounts of taxes withheld. For calendar years 1998 and 1999, the IRS notified numerous States of substantial penalties incurred as a result of late or insufficient deposits of taxes withheld from benefits. Penalties such as these must be paid from either State general revenue or penalty and interest funds (see OMB Circular A-87, Section 20. Fines and penalties) and place an additional financial strain on States.

    The IRS becomes aware of the late deposits when States complete and submit Form 945 (Annual Return of Withheld Federal Income Tax) and Form 945-A (Annual Record of Federal Tax Liability) to the IRS each January. By comparing the dates of a State's deposits with the daily accrued total liability within each deposit period, as shown on Form 945-A, the IRS can determine if deposits were made timely. Section 6656(a) of the Internal Revenue Code directs the IRS to impose a penalty for "Underpayment of Deposits." Usually, the penalties result from a SESA's failure to properly adjust its deposit frequency when its accumulated liability within a deposit period reaches $100,000. Penalties are often assessed for both the current and preceding years, since notification of the deposit error usually occurs several months into the year following the first year in which deposits were late.

  4. Recommendations. The following recommendations are made to assist States in avoiding penalties due to late or inadequate deposits and taking the most appropriate action if a penalty notice is received:

    1. Complete Form 945-A daily. States should complete Form 945-A each day that checks are written and keep a running total of the cumulative deposit liability within each deposit period. Keeping a cumulative total will help to ensure that SESAs comply with the $100,000 Next-Day Deposit Rule. (See page 18, Circular E.) The $100,000 Next-Day Deposit Rule states, "If you accumulate a tax liability (reduced by any advance Earned Income Credit) of $100,000 or more on any day during a deposit period, you must deposit the tax by the next banking day, whether you are a monthly or semiweekly schedule depositor." Please note that this rule applies to all UI benefits, plus any other State payments made to individuals that are reportable on Form 1099, from which Federal income taxes are withheld.

    2. Report receipt of penalty notice to the appropriate Regional Office (RO). SESAs should inform their RO if they receive, or have received, a penalty notice for late or improper deposits. This should be done even though the penalty may have already been paid or abated. Reporting the penalties will enable the RO to provide the National Office (NO) with helpful information about the scope of this problem. The information will be used by the NO in ongoing discussions with the IRS and SESAs to resolve the penalty issues.

    3. File a written appeal if penalty notice is received. Penalties for late deposits may be abated if failure to make the deposit timely was "due to reasonable cause and not to willful neglect" (see page 20, Circular E). A signed appeal must be sent to the IRS following the instructions in the "Removal of Penalty" section of the penalty notification letter. The appeal must be filed by the due date shown on the penalty letter and the reason for the late deposits explained in order to receive consideration for abatement. Some SESAs have found their IRS FedState Coordinators (now called Program Managers) to be helpful in correcting their deposit procedures and assisting with the appeals process. SESA administrators who need the name, location, and telephone number of their IRS regional FedState Program Manager may contact the FedState Division of the IRS at (202) 622-3646.

  5. Action Required. SESA Administrators are requested to provide this information to appropriate staff.

  6. Inquiries. Questions regarding this issue should be directed to the appropriate ETA Regional Office.