Form 941 is the employer’s quarterly federal tax return. It reports how much federal income taxes were withheld; Social Security taxes and Medicare taxes that are due and how much was paid in deposits to the Internal Revenue Service. The report is filed every three months for each of the four calendar quarters. If you are an employer and hire staff, you must file this return every quarter. Failure to comply is met with stiff penalties and interest on the debt. This is an introduction to the basic concepts of how the quarterly tax return ties to the payroll.
One of the largest sources of cash for the Treasury Department is the payment of payroll taxes on a regular basis. Most small businesses pay this tax every month and it is due by the 15th of the following month of payroll. Taxes withheld in January are due by February 15. On page 2 of the Form 941, the employer reports the actual taxes paid to the Internal Revenue Service. The total paid should equal the total amount due on page 1 of the form.
To fully understand the tax return let’s refresh ourselves with a typical payroll. When the employer writes the check, there is a formula used to determine the final net amount. From the gross wages are subtracted federal income taxes which are determined by the average annual gross salary and filing status (single, married, head of household). In addition to federal taxes the employer withholds 6.2% of the gross wage for Social Security taxes. He further withholds 1.45% of gross wages for Medicare taxes. These two taxes are matched by the employer in equal proportions so that a total of 15.3% of the gross wage is paid to the Internal Revenue Service. The following table illustrates the total tax obligation:
Employee Deduction Employer Match Total
Federal Income Tax $ ZZZ – $ ZZZ
Social Security 6.2% 6.2% 12.4%
Medicare Tax 1.45% 1.45% 2.9%
Total Amount Due $(7.65% of Gross) 7.65% of Gross $ + 15.3% of Gross
The 941 report matches this concept. The employer reports on Line 3 the total income tax withheld from all employees for the entire quarter. In section 5a – 5c the employer reports the total Social Security and Medicare taxes withheld and the employers match as one number. There are basically two numbers being reported to the IRS. The income tax withheld and the total Social Security/Medicare Tax. These two are added together and the total tax obligation is reported on Line 10. Total deposits are reported on Line 11 as a final tabulation from page 2 of the monthly deposits. Total deposits are subtracted from the total tax obligation and any difference is paid with the report.
The quarterly report provides more information such as the total wages for the quarter and the number of employees working during that quarter. This report acts as a control mechanism so that at year end annual payroll reports will be accurate. Furthermore, this quarterly return helps the IRS make sure the employers are keeping up with paying taxes in a timely manner. It does get more complicated than this, but that type of situation(s) becomes applicable once the employer hires more than 3 staff. Future articles will get involved in the more complicated scenarios, but for now this article is dedicated to explaining the basics of the quarterly return.
As you learn more about your responsibilities as an employer you will need to expand your understanding of the respective compliance and reporting requirements. Act on Knowledge.