Next-Day Deposit Rule: IRS Tightens Settlement Requirement
June 10, 2026
A procedural update to the Internal Revenue Manual reduces the settlement period required for relief under the $100,000 next-day deposit rule from two days to one day. Confused? Wasn’t the settlement period already one day? Let me explain.
Background: The Next-Day Deposit Rule
Most companies deposit tax withholding with the IRS on either a monthly or semi-weekly basis. If a company’s cumulative deposit liability for all employees exceeds $100,000, however, under §31.6302-1(c), referred to as the “next-day deposit rule,” the deposit must be completed by the next business day. It is common for stock plan transactions to cause a company’s deposit liability to exceed this threshold.
The threshold applies not on a transaction-by-transaction or employee-by-employee basis, but to the company's total cumulative deposit liability for all compensation paid to all employees. When multiple employees exercise options and/or multiple awards vest on the same day, the combined tax withholding for all transactions can easily exceed $100,000. Consequently, tax withholding for stock plan transactions is often subject to the next-day deposit rule,
Compliance with the one-day deposit rule is challenging. When shares are sold on the open market to cover the tax withholding liability, the funds to make the deposit are not available to the company until the sale transaction has settled. Under the SEC’s current one-day settlement framework, this means that the company will not receive the funds to cover the withholding from the broker until, at the earliest, the second day after the equity transaction: too late to comply with the next-day deposit rule.
Even when shares are withheld to cover taxes or employees pay their taxes in cash, so the company is not waiting for a trade to settle to receive the funds to cover the tax withholding, it can be challenging to complete all tax calculations in time to make the deposit by the next business day.
More Background: IRS Audit Instructions Provide Relief
In recognition of these practical considerations, the IRS Internal Revenue Manual (IRM), which provides instructions to IRS auditors, allows the deposit to be treated as timely if made within one day of the settlement date (see IRM 20.1.4.26.2(5)). Although the IRM is not law and cannot be relied on as precedent, it constitutes internal instructions to IRS auditors and, as such, provides insight into how penalties generally will be assessed during an audit.
When the IRM was last updated with respect to these procedures, the SEC-mandated settlement period was two days. To be eligible for this relief, therefore, the IRM required equity transactions to be settled within two days of the transaction date.
The Update: Settlement Must Now Occur Within One Day
The IRS has now updated the IRM to require settlement to occur within one day of the transaction date. Where this is the case, the deposit deadline under the next-day deposit rule is one day after the settlement date.
If the transaction does not settle within one day, for purposes of the next-day deposit rule, the transaction will be deemed “settled” as of the day after the transaction and the deposit will be due on the next day.
This might not seem like a significant change. Since SEC-mandated one-day settlement has been in effect for several years now, you might think that all transactions settle within a day anyway. But when it comes to equity transactions, this isn’t always the case:
- Transactions that don’t involve an open-market trade aren’t subject to mandated one-day settlement.
- There can be a disconnect between the transaction date for SEC purposes and the transaction date for tax purposes. In some cases, especially in the context of RSUs, the transaction date for purposes of the next-day deposit rule occurs earlier than the transaction date for SEC purposes.
Application of the Next-Day Deposit Rule to Stock Options and Stock-Settled SARs
Application of the IRM to stock options is typically straightforward for public companies, where option exercises are overwhelmingly same-day sales. The option isn’t considered exercised until the sale executes, making the sale date the transaction date for both SEC and tax purposes. Moreover, the broker is required to settle the trade and disburse the funds within one day of the sale date. The company should therefore receive the funds in time to deposit the tax withholding by the day after settlement, ensuring compliance with the next-day deposit rule.
Transactions that don’t involve an open-market sale, such as cash or net exercises or exercises of stock appreciation rights, are subject to the SEC’s mandated settlement period. Previously, companies could have taken up to two days to settle these transactions under the IRS’s audit guidance. Now, when subject to the next-day deposit requirement, they must be settled within one day with the tax deposit completed within one day of settlement.
Application of the Next-Day Deposit Rule to Restricted Stock Units
The treatment of RSUs under the IRM is more complicated because the date that triggers taxation differs from the date that starts the SEC-mandated settlement period. In some cases, the tax deposit may be due before the sale to cover the tax withholding has executed.
Under GLAM 2020-004, when RSUs are paid out upon vesting, the taxable event is the date the company initiates the payment of shares under the award (cash-settled RSUs or those subject to deferred payout aren’t addressed in the GLAM). The GLAM does not define what constitutes initiation of payment of an RSU but includes an example in which the payment initiation date is considered to be the date the company instructs the transfer agent to issue the shares underlying the RSU.
Once payment has been initiated, the deadline under the next-day deposit rule will depend on when the transaction is settled:
- Same-Day Settlement: If the transaction is settled on the payment initiation date, the tax deposit will be due by the next business day.
- Next-Day Settlement: If the transaction is settled on the day following the payment initiation date, the deposit will be due by the second business day after initiation of the payment.
- Longer Settlement: If the transaction is settled more than one day after the payment initiation date, the deposit will still be due by the second business day after initiation of the payment because the transaction will be deemed to be settled on the day after the payment date.
When shares are sold to cover the taxes due on RSUs, the shares sometimes must be sold in multiple lots over several days. For purposes of the next-day deposit rule, however, the transaction must settle within one day of the payment initiation date, after which the company has one additional day to deposit the tax withholding with the IRS. The company may need to deposit the tax withholding with the IRS before receiving the funds from the broker to cover the deposit.
When shares are withheld to cover taxes, the funds for the tax deposit are sourced from the company’s cash reserves, rather than from the sale of the underlying stock. These transactions also are not subject to SEC-mandated one-day settlement; because share withholding does not involve an open-market trade, the company can settle the transaction on its own schedule.
For purposes of the next-day deposit rule: if the payment is settled on or after one day following the payment initiation date, the tax deposit will be due on the second day following the payment initiation date. If the transaction is settled on the payment initiation date, the tax deposit will be due by the next business day.
Private Companies, Too
Although the SEC-mandated one-day settlement period applies only to open-market transactions in public-company stock, US tax regulations, including the next-day deposit rule, apply to both public and private companies.
Other Equity Vehicles
The IRM does not address restricted stock or cash-settled awards such as SARs or RSUs. When transactions in these arrangements trigger the next-day deposit requirement, the tax withholding must be deposited within one business day of the transaction date.
Learn More
For more guidance on tax withholding for equity compensation, check out the following resources: