Legal Definitions - federal tax deposits (FTD)

Federal Tax Deposits (FTD) refers to the mandatory payments that employers must make to the Internal Revenue Service (IRS). These payments consist of various taxes withheld from their employees' paychecks, including federal income tax, Social Security, and Medicare taxes (which fall under the Federal Insurance Contributions Act, or FICA).

Essentially, when an employer pays an employee, they are legally required to hold back a portion of that employee's earnings for taxes. These withheld amounts don't belong to the employer; they are held in trust for the government. Federal Tax Deposits are the mechanism by which employers regularly transfer these withheld funds to the IRS. This system ensures that the government receives its tax revenue promptly and securely, even if a business encounters financial difficulties or bankruptcy. The frequency of these deposits—either monthly or semi-weekly—depends on the employer's total tax liability, and they are typically made electronically through the Electronic Federal Tax Payment System (EFTPS). Failure to make these deposits on time can result in significant penalties for the employer.

• Example 1: Small Business Monthly Deposit

  "The Daily Grind," a local coffee shop with five employees, processes payroll once a month.

  Each month, after paying its employees, The Daily Grind calculates the total federal income tax, Social Security, and Medicare taxes it withheld from all employee wages. By the 15th of the following month, the owner must make a Federal Tax Deposit to the IRS, transferring these collected funds electronically. This ensures the taxes withheld from their baristas' paychecks are sent to the government as required, demonstrating the employer's responsibility to remit withheld funds.

• Example 2: Larger Company Semi-Weekly Deposit

  "Tech Innovate Inc.," a software development firm with 200 employees, runs payroll bi-weekly.

  Due to its larger payroll and higher total tax liability, Tech Innovate Inc. is classified as a semi-weekly depositor by the IRS. This means that if they pay employees on a Wednesday, they must make their Federal Tax Deposit for those withheld taxes by the following Friday. If they pay on a Friday, the deposit is due by the following Wednesday. This more frequent deposit schedule illustrates how larger employers must make more regular FTDs to ensure a continuous flow of significant tax revenue to the IRS.

• Example 3: Special Payment Withholding

  "Global Manufacturing Co." decides to issue substantial year-end bonuses to all its 500 employees in December.

  When Global Manufacturing Co. processes these bonus payments, they are required to withhold a significant amount of federal income tax, Social Security, and Medicare taxes from each bonus. Even though it's a special payment outside their regular payroll cycle, these withheld bonus taxes must also be included in their next scheduled Federal Tax Deposit. This demonstrates that all employee tax withholdings, regardless of whether they come from regular wages or special payments like bonuses, must be promptly remitted to the IRS through an FTD.