IRS Form 941: Ensuring Compliance with Employer Tax Responsibilities

Being an employer makes you responsible for your employee’s taxes, as you must withhold the correct amount from each wage.

Your responsibilities include reporting these withholdings to the IRS on the employer’s quarterly federal tax returns. IRS Form 941 collects information about the total payroll tax amount you withhold during a quarter, the nature of your business, and the deposit method you’re using.

The IRS regulations employers must follow when completing this form are updated frequently. That’s why keeping up with the latest Medicare or Social Security tax rates and the most recent updates of the withholding table can be difficult.

We’ll cover all you need to know about IRS Form 941 to ensure compliance with your tax responsibilities as an employer.

Reporting Federal Payroll Tax

Outsourcing payroll responsibilities to third parties is a widespread practice for small businesses. However, according to Form 941 instructions, an employer must deposit taxes and file tax returns on time, even if they authorize a third party to complete these tasks.

This form asks for the wages, tips, federal income, and your and the employee’s share of Social Security and Medicare taxes your business pays its employees.

Each of your employees must provide you with an updated Form W4, indicating their marital status, dependants, and all other factors that could potentially affect the withholding tax amount.

You must use this information to determine the amount you must withhold from each employee’s wages and calculate how much federal tax you must deposit for a certain quarter.

A company’s quarterly payroll tax includes income, Social Security, Medicare, and state and local taxes.

You’ll report the total amount withheld for federal taxes, except unemployment taxes, on IRS Form 941 and use other forms for state or local taxes.

The tax you must deposit will depend on the information you provide on IRS Form 941.

IRS Form 941 Filing Requirement and Exemptions

Filing the employer’s quarterly tax return is mandatory if your business has one or more employees and pays over $1,000 of payroll taxes in a year. You’ll only have to file the form for seasons when your company employs workers if you’re running a seasonal business.

Employers who withhold under $1,000 from their employees’ wages, salaries, and tips must use the Employer’s Annual Federal Tax Return or IRS Form 944.

Moreover, businesses that employ farmworkers report federal tax withholding on Form 943. In contrast, companies that hire household workers (maids, babysitters, cleaners, etc.) report their tax withholdings on Schedule H Form 1040.

Medicare and Social Security taxes don’t apply to wages under $2,600 paid in cash to household workers. Employers don’t have to withhold these taxes from the cash wages below the $2,200 threshold paid to election workers.

The payroll tax credit for increasing research activities for small businesses is $500,000 in 2023. A company must provide evidence of its intention to conduct qualifying research activities to qualify for this tax credit.

How to Complete Form 941?

Detailed recordkeeping and familiarity with payroll taxes and tax laws that regulate federal tax withholding are prerequisites for successfully completing Form 941. Preparing the form should take around an hour if you already have all the tax withholding information you must disclose.

Completing the form can be much more time-consuming if you’re unsure which percentage of Social Security and Medicare taxes your company covers or how to calculate the quarter’s adjustments for fractions of cents.

The form has five parts, and you must fill out each one regardless of the nature of your business. Here’s what you need to do to complete Form 941.

Part I

You must provide the basic information about your business before diving into tax withholding calculations. Besides EIN and the trade name, you should also indicate the form preparer’s name and address and specify the quarter.

First, you should enter how many workers your business employs, the overall wages, tips, or other forms of compensation you pay, and the total tax withholding amount for the current quarter.

The next step involves calculating the taxable Social Security and Medicare wages using equations next to each item.

You must calculate the following items:

• Social Security tips
• Qualified sick leave
• Taxable Medicare wages and tips

These values will enable you to determine the total Medicare and Social Security taxes.

When done, you should make the adjustments and indicate the total taxes after adjustments on Line 10. Businesses eligible for payroll tax credit for increasing research activities must complete Form 8974 and attach it to Form 941.

The rest of this section gathers information regarding the nonrefundable credit for sick and family leave, the tax withholding amount deposited during a quarter, and the balance due or overpayment amount.

Part II

You’ll have to check your company’s deposit schedule before filling out this portion of the form.

Publication 15 reveals that a business is a monthly depositor if the total taxes after adjustments and nonrefundable credits amount on Line 12 of Form 941 for the last four quarters is under $50,000.

An organization classified as a monthly depositor must pay payroll taxes within one month after the quarter ends. For example, if you’re filing Form 941 for the tax year’s second quarter, you must deposit due taxes by July 15.

A semiweekly deposit schedule applies to all businesses that enter a sum over $50,000 on the form’s Line 12.

Businesses on this deposit schedule have until next Wednesday to pay taxes for wages earned from Wednesday to Friday. In contrast, taxes for wages their employees earn from Saturday until Tuesday are due the following Friday.

Semiweekly depositors must attach Schedule B (Form 941) to Form 941. On the other hand, monthly depositors can list their tax liability for each month and the total liability for the quarter on Form 941.

Attaching the record of your tax liability to Form 941 is mandatory if the amount on Line 12 increases from $2,500 to over $100,000 within a quarter.

Part III

This part of the form collects additional information about businesses that hire seasonal workers. It also allows the form preparer to indicate if a company is closed or no longer paying wages.

The details you’ll provide in this section are:

• Health plan expenses attributable to sick leave wages.
• Family leave wages.
• Amounts under certain collectively bargained agreements allocable to qualified sick leave and family leave wages.

Parts IV and V

The final two sections allow you to name a third-party designee the IRS can contact with additional questions about your company’s payroll taxes. You must sign and date the form in Part V, including your title and the phone number the IRS can use.

Due Dates and Penalties

Your employer’s quarterly tax return is due thirty days after the quarter’s last day. Payroll tax deposit due dates are different from the due dates for filing Form 941, and they depend on the company’s filing history and other factors.

Deposits are due fifteen days after a quarter ends or roughly two weeks before the form’s filing deadline. You must submit this form either electronically or via email by these dates:

• First quarter (January 1 to March 31) – April 30
• Second quarter (April 1 to June 30) – July 31
• Third quarter (July 1 to September 30) – October 31
• Fourth quarter (October 1 to December 31) – January 31

Employers who miss these deadlines face a 5% of the business’s total tax liability penalty. The IRS continues to charge the penalty for the next five months at the same rate for each month the employer’s quarterly tax return is late.

Businesses that don’t pay their payroll taxes on time are subject to a 0.05% of the amount due penalty.

The penalty goes up to 1% of the amount due ten days after the IRS sends a business the notice of intent to levy and continues to grow until the taxpayer satisfies the tax liability.

Paying Taxes with IRS Form 941-V

E-filing Form 941 through the Modernized e-File System (MeF) for employment taxes enables you to make payroll tax deposits with the Electronic Funds Withdrawal system. You must use H&R Block, TurboTax, or similar tax software to access the MeF system.

Optionally, you can mail the form’s paper version to the IRS with Form 941-V. But you should only use it to pay federal payroll taxes under these circumstances:

• Your business is classified as a monthly depositor, and the balance due is over $2,500.
• The amount on Line 12 on your last two employer’s quarterly tax returns is under $2,500, and you don’t have the $100,000 next-day deposit obligation.

In all other cases, you must deposit payroll tax payments via the Electronic Federal Tax Payment System.

Frequently Asked Questions

Using IRS Form 941 to Stay Compliant with Payroll Tax Obligations

Staying compliant with your payroll tax responsibilities is one of the most challenging parts of starting a new business.

It would help if you determine your deposit schedule, learn to calculate taxable Social Security wages, and understand how to adjust tax withholdings before preparing your first Form 941.

Consulting an accountant or a tax professional is generally a good idea, even if you decide to complete the form on your own, because it will ensure you’re compliant with federal tax withholding laws.

Preparing Form 941 will get more difficult as your business grows and you welcome new employees aboard. Outsourcing payroll duties to a PSP or RA familiar with all filing requirements will reduce your workload and allow you to focus on running your business.