Do You Know The Right Lookback Period For Your Organization?
The world of tax law and payroll regulations is a complicated one. Managing pay periods, calculating overtime, and staying current on the latest procedures is no easy task. One critical component of tax law regulation your business needs to comply to is the lookback period.
WHAT IS A LOOKBACK PERIOD?
The lookback period is a cumbersome affair, but in general terms, a lookback period is a determined length of time the IRS uses to make sure your previous tax filings are correct.
The status of your business will determine the length and filing type of your particular lookback period. Let’s take a look at a few common examples to better understand this component of tax law.
WHAT IS A LOOKBACK PERIOD FOR PAYROLL?
Payroll tax deposits are typically made on an annual, monthly, or semi-monthly basis for most small businesses. The payroll tax deposit payment schedule is determined by the volume of payroll the business handles.
For employers filing Form 941, paying monthly or semi-monthly, the lookback period is 12 months, which includes the four quarters which ended on June 30th of the previous year. For example, the lookback period for 2024 would look like:
· Quarter 3: July 1st to September 30, 2022
· Quarter 4: October 1 to December 31, 2022
· Quarter 1: January 1 to March 31, 2023
· Quarter 2: April 1 to June 30, 2023
It’s important to keep in mind that the lookback period for any year extends back a year and a half.
Small businesses with an annual tax liability of less than $1,000 file Form 944, requiring an annual payroll tax submission. For these cases, the lookback period is the second prior calendar year. For instance, the lookback period for 2024 for a small business filing Form 944 is calendar year 2022.
Lookback periods can be exceedingly intricate affairs, and to make sure you’re towing the line, check out more information on the IRS website.
LOOKBACK PERIODS FOR TAX-EXEMPT ORGANIZATIONS
To be classified as a tax-exempt organization by the IRS, the IRS examines a lookback period beginning five years before an excess benefit transaction occurred.
The IRS defines an excess benefit transaction as “a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of a disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration received by the organization.” Essentially, once the transaction qualifies for an audit, the lookback period is five years from the date of the transaction.
LOOKBACK EXCEPTIONS AND EXEMPTIONS
Churches, charities, and non-profits are the most common organizations that qualify for tax-exempt status, but others may also qualify if they meet certain regulations. The two types of exemptions are 501(c)3 and 501(c)4 organizations:
· 501(c)3 organizations
501(c)3 organizations are focused on educational, scientific, charitable, or religious purposes. They are not allowed to be involved with political campaigns, provide any net income to the founder or owner, and must toe the line on public policy.
· 501(c)4 organizations
501(c)4 organizations are focused on social welfare missions; from assisting with public services, promoting community activities, or distributing free local newspapers, these organizations operate largely to serve their communities.
It’s no easy task to become a tax-exempt organization. It’s an arduous process riddled with red tape and complexities, but it can be done by filing the right paperwork. Learn what forms need to be filed and when to qualify for tax-exempt status here.
I’M A NEW EMPLOYER, WHAT’S MY LOOKBACK PERIOD?
A new employer will not have an established lookback period, so by default their deposit schedule will be monthly for the first year. Once there is a determinable lookback period, the IRS will send notice to either accelerate your payment frequency, or instruct you to remain the same.
HOW LONG IS THE LOOKBACK PERIOD?
Understanding the lookback period is key to filing taxes accurately and making sure your organization is in compliance with the latest legislation. If you’re still feeling unsure about lookback periods, it’s best practice to maintain tax deposit records for at least six years. That way, the IRS will have enough data to make an accurate determination.
LET US HELP
AAB Payroll allows you to have peace of mind knowing all local, state and federal payroll taxes are taken care of automatically after payroll. Regardless of the size of your business, we make payroll simple. Our software will ensure your payroll is accurate, easy, and efficient. Request a demo today, or get in touch with our team if you have any questions.
