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What You Should Know About Payroll Tax Filing

What You Should Know About Payroll Tax Filing

How to Solve Payroll Tax Problems

 

Remember the thrill of your first paycheck?
Remember feeling less thrilled when you discovered that your employer held onto
some of it to pay for things like income taxes and Social Security?  Here is everything you need to know about Payroll
Tax Form 941.

Now it’s your turn to be the bearer of bad news.
If you have employees, pay into their income and FICA (Social Security and
Medicare) taxes. And to do that, withhold some of their paycheck.

Here we’ll go over IRS Form 941, the tax form that
makes all this possible.

What is Form 941?

Employers must submit IRS Form 941, also known as
the Employer’s Quarterly Federal
Tax Return
, to report three different taxes:

  1. federal income tax
    withheld from employees’ paychecks
  2. other payroll
    taxes withheld from employee paychecks like social security and Medicare
  3. the employer’s
    portion of social security or Medicare tax

You use Form 941 quarterly to report these taxes.

But you’ll make the tax payments themselves monthly or
every two weeks through direct deposits (more on that below), depending on
the dates wages are paid.

Who must file Form 941?

If you pay wages to an employee (remember: there’s
a difference between employees and independent contractors) you have
to withhold or
‘hold onto’ some of their pay to cover things like income taxes, social
security and Medicare. And you have to file Form 941.

If you’re a seasonal employer, you only need to
File Form 941 in quarters where you’ve paid employee’s wages.

If you’re paying less than $1,000 in employment
tax in a tax year, you’re off the hook (but you must file Form 944 instead).

And if your employees are “household employees” (a
house cook or nanny, that kind of thing), you’ll just fill out Schedule H from Form 1040.

How do I withhold taxes?

If you’re a new employer, have never withheld
money from an employee’s paycheck and never filed Form 941, talk to an
accountant to make sure your bookkeeping and payroll are set
up and that you’re signed up for EFTPS deposits.

You can do this over the phone by calling the IRS at
1-800-555-3453 (have your bank account info ready) or online here. You’ll then have to create a password for your
Electronic Federal Tax Payment System account, which you then must log
into here.

What if I have no employees working for me this
quarter?

You still have to file Form 941. Only seasonal and
agricultural employers who show their status on line 18 of the form don’t have
to file Form 941. (See the IRS’s instructions to Form 941 for more information about who
doesn’t have to file.)

What do I need to have ready before filing it?

Have your tax and payroll records on hand, and information
about taxable tips your employees collected this quarter (here’s the
IRS’s guide to
tip recordkeeping).

How do I submit it to the IRS?

You can e-file Form 941 yourself online, or you
can have someone else do it for you. The IRS explains both options more here.

What does it look like?

The current Form 941 PDF from the IRS contains a two page form, a
voucher, and a fourth extra page of instructions. The first page looks like
this:

Besides the employer information section at the
top, the form contains five parts.

The employer information section

Here you’ll show which period you’re reporting
for, your name, address and employer identification number (EIN). Don’t use
your social security number (SSN) or individual taxpayer identification number
(ITIN) here. You can apply for an EIN online at IRS.gov/EIN.

Part 1

Line 1 asks you for the number of employees working
for you.

Line 2 asks for any wages, tips or other
compensation you paid them.

Line 3 asks for income taxes you withheld from
employees’ paychecks.

If you have no wages, tips or other compensation
subject to social security or Medicare to report this quarter, check the box on
line 4.

Line 5 is the heart of Form 941. It’s all about
calculating your tax obligations and making sure they’re up to date.

Line 5a will ask you to multiply total wages by
12.4% to calculate your social security tax obligation on wages.

Line 5b ask you to do the same thing for tips.

Line 5c is all about calculating Medicare taxes. The
current rate of 2.9% covers both your portion and the employees’ portion.

Line 5d is about any additional taxes on employee
compensation over $200,000, which is taxed at 0.9% and paid by employees.

Line 5e will ask you to total up all the amounts
above.

Line 5f is for employers who have been asked
by the IRS to pay additional taxes on unreported tips. (See the instructions for 941 for more.)

Lines 6-10 will walk you through calculating your
total taxes after adjustments, which you’ll make to account for things like
sick pay and group-term life insurance.

Line 11 is about the qualified small business
payroll tax credit for increasing research activities, which you can read more
about here.

Lines 12-14 take your total taxes and subtract any
payments you’ve already made to come up with your total balance due.

If you overpaid (i.e. line 13 is greater than line
12) you report that on line 15.

Part 2

This part is where you’ll figure out how often you
must send the IRS the taxes you calculated in part 1. Most employers will have
to deposit monthly or every two weeks. If you deposit semi-weekly, you must explain
your tax liability on Schedule B of Form 941.

If you owe more than $100,000 in taxes for the
quarter, you must deposit these taxes immediately. (Read more about the
next-day deposit rule here).

Part 3

Here you’ll show whether you’ve stopped paying
wages altogether, and whether you have any seasonal employees. If you do, you
might not need to file 941 every quarter.

Part 4

If you want to let an accountant, lawyer or tax
prep professional discuss this form with the IRS on your behalf, this is where
you’ll give them permission to do so.

Part 5

Sign and date here to ensure everything you’ve
entered is correct.

Form 941-V, Payment Voucher

If you have a total balance due (i.e. line 14
contains a positive number) use this voucher to pay any taxes you owe to the
IRS.

When do I need to Form 941?

If you’ve never filed 941, you must file your
first copy at the end of the quarter in which your business first started
paying employee wages. You then must file on the last day of the month that
follows the end of every quarter after that.

If you’re not sure when the quarter begins and
ends, consult the following chart from the IRS:

The Quarter Includes…Quarter
Ends
Form
941 Is Due
First
quarter: January, February, March
March
31
April
30
Second
quarter: April, May, June
June
30
July
31
Third
quarter: July, August, September
September
30
October
31
Fourth
quarter: October, November, December
December
31
January
31

If you’ve already made all your tax deposits for
the quarter, you have an additional ten days after the above due dates to get
your Form 941 filed.

Is that all I must worry about?

Not quite. If you withheld taxes from an
employee’s paycheck, you might also need to file Form 940, and there are some state and city-specific
payroll taxes you might have to collect depending on where you do business.
Talk to your accountant to make sure you’re clear on these obligations.

What if I don’t file?

If you don’t file 941, you must pay the IRS 5% of
the tax due for each month you don’t submit, to a maximum of 25%.

You could also incur a second penalty for making
your tax payments late, which run between 2 and 15% of the underpayment,
depending on how late your payments are.

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