IRS Form 941 is the Employer’s Quarterly Federal Tax Return. All employers must withhold federal taxes from employees’ compensation. These taxes include federal income tax, Social Security tax and Medicare tax. Those payments by the employer are credited to employees’ tax liabilities and reported to them (as well as to the IRS) on the annual W-2. Employers must also pay their portion of Social Security and Medicare taxes which are not withheld from employees. The IRS Form 941 is the vehicle for reporting and paying these taxes to the government.
Who Must File?
Employers who withhold taxes as required by law must complete IRS Form 941. The specific amounts reported by the employer on this form include the following: all wages you have paid; federal income tax you withheld on behalf of employees; both your employees’ and your share of Social Security and Medicare taxes; any adjustments to the current quarter’s Social Security and Medicare taxes for fractions of cents, sick pay, tips and group term-life insurance; advanced earned income tax credit (EIC) payments; and credit for COBRA premium assistance payments.
IRS Form 941 should not be used to report backup withholding or income tax withholding on non-payroll payments. Such payments include things like pensions, annuities and gambling winnings. These amounts are reported instead on IRS Form 945 which is an annual and not a quarterly report to the federal government.
There are a few exceptions. Employers do not need to file IRS Form 941 for seasonal employees. For example, in quarters in which you do not pay wages, you have no tax liability, so you do not need to file. However, you must report to the government if there are one or more quarters for which you are exempt each time you do file Form 941. This is reported on line 19.
Employers of household employees are generally exempt from filing IRS Form 941; however, information relative to these employees must be reported on Form 1040, Schedule H, “Household Employment Taxes.”
Finally, employers of farm employees do not report on IRS 941. Instead, they are responsible to file Form 943, “Employers’ Annual Return for Agricultural Employees.”
Selling, Transferring or Closing Your Business
When you sell or transfer your business, both you and the new owner must file IRS Form 941 for the quarter in which the sale or transfer occurred. However, you should only report the wages and taxes you paid prior to the transaction. Likewise, the new owner should only report his share. If you change from one business type to another (for example, from a sole proprietorship to a partnership or corporation), it is considered to be a transfer and should be handled in the same manner. If you merge your business, the firm that will continue the business must file the return for the quarter in which the merger occurred, and the other business should file a final return instead. You must file a final return if you close your business or stop paying wages. You will need to indicate to the IRS that it is a final return and can do so on line 18 of Form 941. Additionally, you must report to the government the name of the individual maintaining the payroll records and the location at which they are being stored.
When You Must File IRS 941
IRS Form 941 is a quarterly report meaning that it is filed every three months. All employers are on the same quarterly payment schedule, and you must file your first IRS 941 at the end of the first quarter in which you paid wages. If, for example, you paid your first wages in February, you would be responsible to file the IRS 941 for that quarter.
The form is due on the last day of the month following the end of the quarter. The first quarter ends on March 31, so you must file by April 30. The remaining due dates are July 31 (second quarter ending June 30 ), October 31 (third quarter ending September 30th) and January 31 (fourth quarter ending December 31).
If you make timely payments of the taxes owed during the quarter, the IRS will grant a 10-day extension to the due date of Form 941. Like your normal 1040 form for personal taxes, the post marked date determines the timeliness of filing.
Depositing Your Taxes
Although Form 941 is only due to the IRS on a quarterly basis, you must pay the taxes much more frequently, and the payment schedule does not depend on your payroll schedule. There are two types of payment schedules, and your schedule will depend on your total tax liability. Remember, this includes Social Security, Medicare and withheld federal income tax. Your liability is determined by your reporting on Form 941 for a four-quarter “look-back” period. This period runs from July 1 (of two years prior) to June 30 of the prior year.
Before the start of each calendar year, you must determine your payment schedule. If you paid $50,000 or less in taxes during the “look back” period, you are a monthly schedule depositor. If your tax liability for that period exceeded $50,000, you are a semiweekly schedule depositor.
If your total tax liability for the quarter (after appropriate adjustments) is less than $2500, you do not have to pre-deposit the funds. Instead, you must make a timely payment when filing your IRS Form 941. If your quarterly tax liability exceeds $2500, then you must deposit according to your schedule (monthly or semiweekly). Deposits can be made at financial institutions that are qualified to accept them or by way of the Electronic Federal Tax Payment System (EFTPS).
Penalties and Interest
Penalties and interest are charged on late tax payments as well as late filed returns as established by law. In order to avoid penalties and interest, do the following: deposit taxes on or before the due date, using EFTPS when required; file your fully completed and accurate Form 941 on time; report your tax liability accurately; submit valid check for tax payments; furnish accurate W-2 forms to your employees; files forms W-3 and Copies A of the W-2 to the Social Security Administration in timely and accurate fashion. It is a smart idea to regularly check the IRS website for updated information as the tax law is always changing and since the IRS Form 941 is a quarterly filing.