How to Stay Compliant With Business and Payroll Taxes

Roni Deutch
July 23, 2009 — 1,756 views  
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Form 941 Employer's Quarterly Federal Tax Return

Federal law requires individuals to pay taxes on their income. To ensure collection of individual income taxes, the government requires employers to withhold, and send to the government, a portion of paychecks for certain types of employees. For each of these "W-2" type employees, the employer withholds a calculated part (based on the amount of income and the number of exemptions the employee claims) of each paycheck. The employer holds these withholdings "in trust" and then sends the funds to the government.

The employer withholds three types of federal taxes: Federal Income Tax, Social Security Tax, and Medicare Tax. These three taxes should be separately itemized on W-2 paycheck stubs.

The Employer's Responsibility

Unfortunately sending the employees' taxes to the government is not the end of an employers responsibility. Employers must also pay a tax in the form of the employer's matching contribution to Social Security and Medicare taxes for their employees. Generally, for every dollar of Social Security and Medicare taxes the employee must pay, the employer must pay a matching dollar of Social Security and Medicare taxes. For 2009, the tax rate for employees for Social Security is 6.2%; the employer also must pay 6.2%. For 2009, the tax rate for employees for Medicare is 1.45%; the employer also must pay 1.45%.

Employers must send their portion and the withheld employee's portion of the taxes to the government. Failure to send either the employer's or employee's portion (or both) results in a payroll back tax liability. Failing to pay payroll taxes on time will also result in penalties and interest for the balances due.

The employer is required to send their portion and the employee's' portion of the taxes to the government on a regular basis. These regular payments are referred to as Federal Tax Deposits (FTD). IRS rules govern how often an employer must make these deposits. Failure to make timely deposits can result in penalties. Additionally, failure to make timely deposits can prevent tax liability resolution (i.e. Offer in Compromise, Installment Agreement, and Currently Not Collectible status).

FTD vs. ETP

It can be easy to confuse Federal Tax Deposits (FTD) with Estimated Tax Payments (ETP). In both cases, a business is making regular payments of income-related taxes to the federal government throughout the course of the year. Additionally, both FTD and ETP have a "quarterly" element that can also cause confusion: FTD is reported on a 941 quarterly return, ETP should be paid quarterly. When dealing with a taxpayer that has employees, you should remember that the FTD is related to the employees' income and the ETP is related to the employer's income.

In short, the 941 return is a report of the employer's FTD for a quarter of the year. The quarters end on March 31st, June 30th, September 30th, and December 31 of each year. The respective 941 returns are due on April 30th, July 31st, October 31st, and January 31st.

Form 944 Employer's Annual Federal Tax Return

A Form 944 is a version of Form 941 for certain employers who qualify. The 944 is filed annually instead of quarterly. An Employer may use the Form 944 instead of the Form 941 if it has FTD totaling less than $1,000 for the year. Typically, the IRS will inform an employer whether to file a Form 944 or a Form 941.

Form 943 Employer's Annual Federal Tax Return for Agriculture Employees

A Form 943 is also similar to a Form 941, but for employers who have employees who are farmworkers. The return is filed annually for employers who pay have paid more than $2,500 in total wages for the year (for all employees) or have paid one employee at least $150 in wages.

Form 940 Employer's Annual Federal Unemployment Tax Return (FUTA)

What is it?

The Federal Unemployment Tax Act (FUTA) tax is another tax on employers who have W-2 employees. The collected FUTA tax funds are used to provide unemployment compensation to individuals who have lost jobs. The first $7,000 an employer pays to each of its W-2 employees is subject to the tax. Any dollar amount paid to any individual employee over $7,000 is not subject to the tax. The FUTA tax rate for 2009 is 6.2%. This rate was scheduled to decrease to 6.0% starting January 1, 2009, however, the decrease was suspended by Public Law 110-343 through December 31, 2009.

Who must file 940 returns?

Most employers with W-2 employees have to file Form 940 so long as they meet a minimum employment threshold. However, some entities are exempt from FUTA and, consequently, do not need to file the return. The most common exempt employers are state and local governments, federally recognized Indian tribal governments, and non-profit organizations (religious, charitable, scientific, educational, and other organizations exempt under IRC Section 503©(3)). For all other employers, if they meet either of the following criteria they must file a 940 return:

1. Employer paid more than $1,500 in wages in any calendar quarter during the year
2. Employer had one (or more) W-2 employee for at least some part of a day (or days) in each of 20 or more weeks during the year.

The Tax Lady Roni Deutch and her law firm Roni Lynn Deutch, A Professional Tax Corporation have been helping taxpayers across the nation find IRS tax relief for over seventeen years. The firm has experienced tax lawyers who can fight IRS tax liens on your behalf.

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Roni Deutch