Bookkeeping – Quarterly and Annual Payroll Reports (Lesson 34)
Federal and state compliance requires the filing of several different reports by certain deadlines. In this lesson I explain the various reports, filing deadlines and best practices to comply with the law. I’ll explain the quarterly set of reports first then the respective annual requirements.
The primary quarterly report is Form 941 or 941 for short. It basically reports the following information:
- Gross Wages – Total gross compensation in the various forms paid to all employees for the entire quarter.
- Income Tax Withheld – Amount of tax withholding for federal income tax purposes is identified as the 2nd line item value on the form; this value is for all employees combined.
- Social Security Wages and Tax – Form 941 requires the employer state the total Social Security wage base (can be different from total gross wages; this is explained in future lessons, specifically in the advanced series section for payroll) along with the total tax applicable and the actual amount withheld from employees and the corresponding match by the employer.
- Medicare Wages and Tax – This is very similar to the Social Security Wages as explained above. However, Medicare wages can be different from Social Security Wages and Gross Wages. In most small business environments (less than 10 employees) the three dollar values are identical.
- Total Taxes Owed
- Total Taxes Paid
Of all reports generated and filed with various authorities the 941 is the most important for payroll purposes. It is essential to file an accurate and timely report. Due dates are as follows:
1st Quarter (Jan – March) – Due April 30th
2nd Quarter (April – June) – Due July 31
3rd Quarter (July – Sept) – Due October 31
4th Quarter (Oct – Dec) – Due January 31 of the next calendar year
The Form 941 is basically due within one month of the end of the quarter. NO EXCEPTIONS are granted. To ensure compliance with a date deadline, send this report registered via the post office. Many small businesses use e-file to comply with the law. All e-filing software use a control number (a unique identifier) for each electronic submission. Print your control number and confirmation and place this document in both the paper and electronic folder as explained in Lesson 33.
If you follow the suggested monthly reconciliations I endorse in Lessons 32 and 33, preparation and processing time for the 941 will take less than two hours.
Other quarterly reports include:
A) State Income Taxes Withheld – Each state is different (nine state are income tax free) in their respective documentation process. Most require a reconciliation to the monthly or payroll run reports filed. Again, if a bookkeeper reconciles monthly it is merely a 20 minute report preparation and processing time frame to complete this form.
B) FUTA – There is no form to file for any respective quarter. This is an annual report. However, tax deposit compliance is required. I encourage small businesses to make their deposits each month during the first quarter. Deposits should be based on the respective monthly reconciliations. The first quarter balance is due by April 15th, a mere 15 days after the end of the quarter.
The first three quarters require the balance due payment processed by the 15th day after the end of the quarter. Since small businesses are required to use the electronic payment system (EFTPS) and this system has a 24 hour processing delay, I encourage all bookkeepers and accountants to pay the tax by the 12th of the month. The system does not process payments on weekends (the Federal Reserve is closed). The actual paper report and final payment is explained in the annual section later in this article.
C) State Unemployment Tax (SUTA) – Similar to state income tax withholding reports, each state is different. My understanding is that all 50 states require quarterly reports. In general, each state wants the following information:
- Total gross wages
- Total taxable wages
- Earnings per employee (reported by name and Social Security Number)
- Calculated tax
- Balance due
As with the Form 941, I encourage registered mail or an electronic receipt. Place copies of signed forms in the respective quarterly folders.
This form does take a little longer to process due to the formulas involved, so expect this take upwards of two hours.
Payroll revolves around on single report – the W-2. This is the employee’s wage and earnings statement. It identifies the following:
- Taxable Wages
- Social Security Wages
- Medicare Wages
For over 75% of employees all three wage amounts will be equal. High earners (> $118,000) will most likely have different taxable wages than Social Security or Medicare wages. Owners are the rare exceptions whereby all three dollar amounts may be different. I encourage you to read about compliance in the employer payroll tax section of this website. The owner issues are explained in more detail in the advanced bookkeeping section of this site. The following are the different fields of information on the W-2:
- Taxable Wages
- Income Tax Withholding
- Social Security and Medicare Withholding
- State Income Tax Withheld along with State Identifiers
- Retirement Contributions Made
- Benefit Payments Made
- Earned Income Tax Credits Received
- Other Forms of Payments or Withholdings (Health Insurance Premiums, Child Care Payments, Vision, Dental etc.)
All of these values must reconcile to the penny per each item. Section 31.6001 of the regulations mandate compliance. The employee typically receives four copies for his tax filing and personal records. The primary sheet is filed with the Social Security Administration. A fifth copy is filed with the state’s tax department (or revenue department). A final copy is retained by the employer. Current law requires filing of the W-2’s by January 31 of the month following the calendar year of payroll. The deadline is to have the form in the mail postmarked to the employee. Any forms returned to the employer due to change of address issues are held in that employee’s folder for a least three years.
Form W-3 is a summation report of all W-2’s and is due along with the primary sheet (usually a light red color) of the W-2 to the Social Security Administration by February 28th after the end of the respective calendar year. This form is signed by the owner or an officer for compliance purposes.
Form 940 is due by January 31 after the close of the calendar year. It is a two page return identifying total gross wages (should match Medicare wages on the W-3), total taxable wages (first $7,000 of each employee’s wages) and the corresponding total tax obligation. Page two identifies the four total quarterly amounts paid which is summed back to page one. Any balance due is paid via either EFTPS (don’t forget the 24 hour processing delay) or via a payment coupon, 940-V (V represents voucher) postmarked by January 31.
State Departments of Revenue or Taxation Reports
The 41 states that tax wages for income tax purposes use a separate form to reconcile the entire tax year to the quarterly or monthly filings. Each state requires a copy of the W-2 for each employee and an explanation of why there is a discrepancy between amounts reported each quarter and the total actually withheld from employees if a discrepancy exists. Most states require this report by the 31st of January following the payroll calendar year.
State Unemployment Annual Report
Some states require a reconciliation of unemployment wages to federal wages. Check with either your CPA or state’s unemployment division for the requirements of your state.
Summary – Quarterly and Annual Payroll Reports
Although it appears overwhelming, preparation of these respective reports becomes perfunctory after several iterations. Expect to dedicate a day to complete the entire annual set of reports. Payroll compliance focuses on the W-2. All reports sum into the W-2. If you practice accurate payroll processing from one payroll run to the next, reconcile monthly and quarterly, the W-2’s will print correctly. Practice good organization and the bookkeeper will end up with accurate and timely reports. Act on Knowledge.
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