[Code of Federal Regulations]
[Title 26, Volume 20]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR601.401]

[Page 93-97]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 601_STATEMENT OF PROCEDURAL RULES--Table of Contents
 
        Subpart D_Provisions Special to Certain Employment Taxes
 
Sec. 601.401  Employment taxes.


    (a) General--(1) Description of taxes. Federal employment taxes are 
imposed by Subtitle C of the Internal Revenue Code. Chapter 21 (Federal 
Insurance Contributions Act) imposes a tax on employers of one or more 
individuals and also a tax on employees, with respect to ``wages'' paid 
and received. Chapter 22 (Railroad Retirement Tax Act) imposes (i) an 
employer tax and employee tax with respect to ``compensation'' paid and 
received, (ii) an employee representative tax with respect to 
``compensation'' received, and (iii) a supplemental tax on employers, 
measured by man-hours for which ``compensation'' is paid. Chapter 23 
(Federal Unemployment Tax Act) imposes a tax on employers of one or more 
individuals with respect to ``wages'' paid. Chapter 24 (collection of 
income tax at source on wages) requires every employer making payment of 
``wages'' to deduct and withhold upon such wages the tax computed or 
determined as provided therein. The tax so deducted and withheld is 
allowed as a credit against the income tax liability of the employee 
receiving such wages.
    (2) Applicable regulations. The descriptive terms used in this 
section to designate the various classes of taxes are intended only to 
indicate their general character. Specific information relative to the 
scope of each tax, the forms used, and the functioning of the Service 
with respect thereto is contained in the applicable regulations. Copies 
of all necessary forms, and instructions as to their preparation and 
filing, may be obtained from the district director of internal revenue.
    (3) Collection methods. Employment taxes are collected by means of 
returns and by withholding by employers. Employee tax must be deducted 
and withheld by employers from ``wages'' or ``compensation'' (including 
tips reported in writing to employer) paid to employees, and the 
employer is liable for the employee tax whether or not it is so 
deducted. For special rules relating to tips see Sec. Sec. 31.3102-3 
and 31.3402 (k)-1. Rev. Proc. 81-48, 1981-2 C.B. 623, provides 
guidelines for determining wages when the employer pays the employee tax 
imposed by Chapter 21 without deducting the amount from the employee's 
pay. Employee representatives (as defined in the Railroad Retirement Tax 
Act) are required to file returns. Employment tax returns must be filed 
with the district director or, if so provided in instructions applicable 
to a return, with the service center designated in the instructions. The 
return of the Federal unemployment tax is required to be filed annually 
on Form 940 with respect to wages paid during the calendar year. All 
other returns of Federal employment taxes (with the exception of returns 
filed for agricultural employees) are required to be filed for each 
calendar quarter except that if pursuant to regulations the district 
director so notifies the employer, returns on Form 941 are required to 
be filed on a monthly basis. In the case of certain employers required 
to report withheld income tax but not required to report employer and 
employee taxes imposed by Chapter 21 (for example, state and local 
government employers), Form 941E is prescribed for reporting on a 
quarterly basis. The employer and employee taxes imposed by Chapter 21 
(other than the employer and employee taxes on wages paid for 
agricultural labor) and the tax required to be deducted and withheld 
upon wages by Chapter 24 are combined in a single return on Form 941. In 
the case of wages paid by employers for domestic service performed in a 
private home not on a farm operated for profit, the return of both the 
employee tax and the employer tax imposed by Chapter 21 is on Form 942. 
However, if the employer is required to file a return for the same 
quarter on Form 941, the employer may elect to include the taxes with 
respect to such domestic service on Form 941. The employer and employee 
taxes imposed by Chapter 21 with respect to

[[Page 94]]

wages paid for agricultural labor are required to be reported annually 
on Form 943. Under the Railroad Retirement Tax Act, the return required 
of the employer is on Form CT-1, and the return required of each 
employee representative is on Form CT-2. An employee is not required to 
file a return of employee tax, except that the employee must include in 
his or her income tax return (as provided in the applicable 
instructions) any amount of employee tax (i) due with respect to tips 
that the employee failed to report to the employer or (ii) shown on the 
employee's Form W-2 as ``Uncollected Employee Tax on Tips''.
    (4) Receipts for employees. Employers are required to furnish each 
employee a receipt or statement, in duplicate, showing the total wages 
subject to income tax withholding, the amount of income tax withheld, 
the amount of wages subject to tax under the Federal Insurance 
Contributions Act, and the amount of employee tax withheld. See section 
6051 of the Code.
    (5) Use of authorized financial institutions in connection with 
payment of Federal employment taxes. Most employers are required to 
deposit employment taxes either on a monthly basis, a semimonthly basis 
or quarter-monthly period basis as follows:
    (i) Quarter-monthly period deposits. With respect to wages paid 
after January 31, 1971 (March 31, 1971, in the case of wages paid for 
agricultural labor), if at the close of any quarter-monthly period (that 
ends on the 7th, 15th, 22d, or the last day of any month) the aggregate 
amount of undeposited taxes, exclusive of taxes reportable on Form 942, 
is $2,000 or more, the employer shall deposit such taxes within 3 
banking days after the close of such quarter-monthly period.
    (ii) Monthly deposits. With respect to employers not required to 
make deposits under subdivision (i) of this subparagraph, if after 
January 31, 1971 (March 31, 1971, in the case of income tax withheld 
from wages paid for agricultural labor) (a) during any calendar month, 
other than the last month of a calendar quarter, the aggregate amount of 
the employee tax deducted and the employer tax under Chapter 21 and the 
income tax withheld at source on wages under Chapter 24, exclusive of 
taxes reportable on Form 942, exceeds $200 or (b) at the end of any 
month or period of 2 or more months and prior to December 1 of any 
calendar year, the total amount of undeposited taxes imposed by Chapter 
21, with respect to wages paid for agricultural labor, exceeds $200, it 
is the duty of the employer to deposit such amount within 15 days after 
the close of such calendar month.
    (iii) Quarterly and year-end deposits. Whether or not an employer is 
required to make deposits under subdivisions (i) and (ii) of this 
subparagraph, if the amount of such taxes reportable on Form 941 or 943 
(reduced by any previous deposits) exceeds $200, the employer shall, on 
or before the last day of the first calendar month following the period 
for which the return is required to be filed, deposit such amount with 
an authorized financial institution. However, if the amount of such 
taxes (reduced by any previous deposits) does not exceed $200, the 
employer may either include with his return a direct remittance for the 
amount of such taxes or, on or before the last day of the first calendar 
month following the period for which the return is required to be filed, 
voluntarily deposit such amount with an authorized financial 
institution.
    (iv) Additional rules. Deposits under subdivisions (i), (ii) and 
(iii) of this subparagraph are made with an authorized financial 
institution. The remittance of such amount must be accompanied by a 
Federal Tax Deposit form. Each employer making deposits shall report on 
the return for the period with respect to which such deposits are made 
information regarding such deposits in accordance with the instructions 
applicable to such return and pay therewith (or deposit by the due date 
of such return) the balance, if any, of the taxes due for such period.
    (v) Employers under Chapter 22 of the Code. Depositary procedures 
similar to those prescribed in this subparagraph are prescribed for 
employers as defined by the Railroad Retirement Tax Act, except that 
railroad retirement taxes are not requested to be deposited semimonthly 
or quarter-monthly. Such

[[Page 95]]

taxes must be deposited by using a Federal Tax Deposit form.
    (vi) Employers under chapter 23 of the Code. Every person who is an 
employer as defined by the Federal Unemployment Tax Act shall deposit 
the tax imposed under Chapter 23 on or before the last day of the first 
calendar month following the quarterly period in which the amount of 
such tax exceeds $100.
    (6) Separate accounting. If an employer fails to withhold and pay 
over income, social security, or railroad retirement tax due on wages of 
employees, the employer may be required by the district director to 
collect such taxes and deposit them in a separate banking account in 
trust for the United States not later than the second banking day after 
such taxes are collected.
    (b) Provisions special to the Federal Insurance Contributions Act--
(1) Employers' identification numbers. For purposes of the Federal 
Insurance Contributions Act each employer who files Form 941 or Form 943 
must have an identification number. Any such employer who does not have 
an identification number must secure a Form SS-4 from the district 
director of internal revenue or from a district office of the Social 
Security Administration and, after executing the form in accordance with 
the instructions contained thereon, file it with the district director 
or the district office of the Social Security Administration. At a 
subsequent date the district director will assign the employer a number 
which must appear in the appropriate space on each tax return, Form 941 
or Form 943, filed thereafter. The requirement to secure an 
identification number does not apply to an employer who employs only 
employees who are engaged exclusively in the performance of domestic 
service in the employer's private home not on a farm operated for 
profit.
    (2) Employees' account numbers. Each employee (or individual making 
a return of net earnings from self-employment) who does not have an 
account number must file an application on Form SS-5, a copy of which 
may be obtained from any district office of the Social Security 
Administration or from a district director of internal revenue. The 
form, after execution in accordance with the instructions thereon, must 
be filed with the district office of the Social Security Administration, 
and at a later date the employee will be furnished an account number. 
The employee must furnish such number to each employer for whom the 
employee works, in order that such number may be entered on each tax 
return filed thereafter by the employer.
    (3) Reporting of wages. Forms 941, 942, and 943 each require, as a 
part of the return, that the wages of each employee paid during the 
period covered by the return be reported thereon. Form 941a is available 
to employers who need additional space for the listing of employees. 
Employers who meet the requirements of the Social Security 
Administration may, with the approval of the Commissioner of Internal 
Revenue, submit wage information on reels of magnetic tape in lieu of 
Form 941a. It is necessary at times that employers correct wage 
information previously reported. A special form, Form 941c, has been 
adopted for use in correcting erroneous wage information or omissions of 
such wage information on Form 941, 942, or 943. Instructions on Form 
941, 941c, 942, and 943 explain the manner of preparing and filing the 
forms. Any further instructions should be obtained from the district 
director.
    (c) Adjustments by employers--(1) Undercollections and 
underpayments--(i) Employer tax or employee tax. If a return is filed by 
an employer under the Federal Insurance Contributions Act or the 
Railroad Retirement Tax Act, and the employer reports and pays less than 
the correct amount of employer tax or employee tax, the employer is 
required to report and pay the additional amount due. The reporting will 
be an adjustment without interest only if the employer reports and pays 
the additional amount on or before the last day on which the return is 
required to be filed for the return period in which the error is 
ascertained. The employer may so report the additional amount either on 
the return for that period or on a supplemental return for the period 
for which the underpayment was made. If the employer fails to report the 
additional amount due within the time so fixed for making an interest-
free adjustment, the employer nevertheless is

[[Page 96]]

required to report the additional amount in the same manner, but 
interest will be due. No adjustment of an underpayment may be made under 
this section or Sec. 31.6205-1(b)(2) if the employer is sent a notice 
and demand for payment of the additional tax.
    (ii) Income tax withholding. If an employer files a return reporting 
and paying less than the correct amount of income tax required to be 
withheld from wages paid during the return period, the employer is 
required to report and pay the additional amount due, either (a) on a 
return for any return period in the calendar year in which the wages 
were paid, or (b) on a supplemental return for the return period in 
which the wages were paid. The reporting will be an adjustment without 
interest only if the employer reports and pays the additional amount on 
or before the last day on which the return is required to be filed for 
the return period in which the error was ascertained. If an employer 
reports and pays less than the correct amount of income tax required to 
be withheld in a calendar year, and the employer does not correct the 
underpayment in the same calendar year, the employer should consult the 
District Director of Internal Revenue as to the manner of correcting the 
error.
    (2) Overcollections from employees--(i) Employee tax. If an employer 
collects from an employee more than the correct amount of employee tax 
under the Federal Insurance Contributions Act or the Railroad Retirement 
Act, and the error is ascertained within the applicable period of 
limitation on credit or refund, the employer is required either to repay 
the amount to the employee, or to reimburse the employee by applying the 
amount of the overcollection against employee tax which otherwise would 
be collected from the employee after the error is ascertained. If the 
overcollection is repaid to the employee, the employer is required to 
obtain and keep the employee's written receipt showing the date and 
amount of the repayment. In addition, if the employer repays or 
reimburses an employee in any calendar year for an overcollection which 
occurred in a prior calendar year, the employer is required to obtain 
and keep the employee's written statement (a) that the employee has not 
claimed refund or credit of the amount of the overcollection, or if so, 
such claim has been rejected, and (b) that the employee will not claim 
refund or credit of such amount.
    (ii) Income tax withholding. If, in any return period in a calendar 
year, an employer withholds more than the correct amount of income tax, 
and pays over to the Internal Revenue Service the amount withheld, the 
employer may repay or reimburse the employee in the excess amount in any 
subsequent return period in the same calendar year. If the amount is so 
repaid, the employer is required to obtain and keep the employee's 
written receipt showing the date and amount of the repayment.
    (3) Employer's claims for credit or refund of overpayments--(i) 
Employee tax. If an employer repays or reimburses an employee for an 
overcollection of employee tax, as described in subparagraph (2)(i) of 
this paragraph, the employer may claim credit on a return in accordance 
with the instructions applicable to the return. In lieu of claiming 
credit the employer may claim refund by filing Form 843, but the 
employer may not thereafter claim credit for the same overpayment.
    (ii) Income tax withholding. If an employer repays or reimburses an 
employee for an excess amount withheld as income tax, as described in 
subparagraph (2)(ii) of this paragraph, the employer may claim credit on 
a return for a return period in the calendar year in which the excess 
amount was withheld. The employer is not otherwise permitted to claim 
credit or refund for any overpayment of income tax that the employer 
deducted or withheld from an employee.
    (d) Special refunds of employee social security tax. (1) An employee 
who receives wages from more than one employer during a calendar year 
may, under certain conditions, receive a ``special refund'' of the 
amount of employee social security tax (i.e., employee tax under the 
Federal Insurance Contributions Act) deducted and withheld from wages 
that exceed the following amounts: calendar years 1968 through 1971, 
$7,800; calendar year 1972, $9,000; calendar year 1973, $10,800; 
calendar year 1974, $13,200; calendar years

[[Page 97]]

after 1974, an amount equal to the contribution and benefit base (as 
determined under section 230 of the Social Security Act) effective with 
respect to that year. An employee who is entitled to a special refund of 
employee tax with respect to wages received during a calendar year, and 
who is required to file an income tax return for such calendar year (or 
for his last taxable year beginning in such calendar year), may obtain 
the benefits of such special refund only by claiming credit for such 
special refund on such income tax return in the same manner as if such 
special refund were an amount deducted and withheld as income tax at 
source on wages.
    (2) The amount of the special refund allowed as a credit shall be 
considered as an amount deducted and withheld as income tax at source on 
wages. If the amount of such special refund when added to amounts 
deducted and withheld as income tax under chapter 24 exceeds the income 
tax imposed by chapter 1, the amount of the excess constitutes an 
overpayment of income tax, and interest on such overpayment is allowed 
to the extent provided under section 6611 of the Code upon an 
overpayment of income tax resulting from a credit for income tax 
withheld at source on wages.
    (3) If an employee entitled to a special refund of employee social 
security tax is not required to file an income tax return for the year 
in which such special refund may be claimed as a credit, the employee 
may file a claim for refund of the excess social security tax on Form 
843. Claims must be filed with the district director of internal revenue 
for the district in which the employee resides.
    (4) Employee taxes under the Federal Insurance Contributions Act and 
the Railroad Retirement Tax Act include a percentage rate for hospital 
insurance. If in 1968 or any calendar year thereafter employee taxes 
under both Acts are deducted from an employee's wages and compensation 
aggregating more than $7,800, the ``special refund'' provisions may 
apply to the portion of the tax that is deducted for hospital insurance. 
The employee may take credit on Form 1040 for the amount allowable, in 
accordance with the instructions applicable to that form.

[32 FR 15990, Nov. 22, 1967, as amended at 33 FR 6825, May 4, 1968; 33 
FR 17239, Nov. 21, 1968; 36 FR 7586, Apr. 22, 1971; 38 FR 4970, Feb. 23, 
1973; 39 FR 8918, Mar. 7, 1974; 41 FR 20883, May 21, 1976; 45 FR 7257, 
Feb. 1, 1980; 49 FR 19648, 19649, May 9, 1984; 49 FR 25239, June 20, 
1984; 49 FR 36500, Sept. 18, 1984; T.D. 8952, 66 FR 33832, June 26, 
2001]