Understanding Form 941: A Must-Read Guide for Every Business Owner

Form 941 is one of the essential tax forms that every business owner should be familiar with, as these forms need to be filed quarterly. Consequently, understanding Form 941 and the new changes is important for businesses to ensure compliance. In this blog, we will be discussing Form 941 and its new filing requirements.

What is IRS Form 941?

Form 941 is an IRS tax form used by the business to report the income taxes of both employees’ and employers’ share of payroll taxes withheld during the year.

What are the Changes in Form 941 for the 2023 Tax Year?

While the last quarter of the 2023 tax year saw no major changes to Form 941, the IRS implemented some minor adjustments to the Employer’s Quarterly Federal Tax Return earlier in the year. Here’s a summary of the key modifications:

1. New Worksheet Addition:

• A new worksheet, Worksheet 2: Credit for Qualified Sick and Family Leave Wages Paid This Quarter of 2023 for Leave Taken After March 31, 2021, and Before October 1, 2021, has been introduced.
• Applicable to businesses that disbursed qualified sick/family leave wages in the current quarter of 2023 for leave taken after March 31, 2021, and before October 1, 2021.

2. Social Security Wage Base Limit:

• The Social Security wage base limit for the 2023 tax year has been set at $160,200.

3. Medicare Tax Rate:

• The Medicare tax rate remains unchanged at 1.45% for both employees and employers in 2023. There is no wage base limit for Medicare tax.

4. Social Security and Medicare taxes for household workers

• Social Security and Medicare taxes apply to household workers earning $2,600 or more in cash wages in 2023, and to election workers receiving $2,200 or more in cash or an equivalent form of compensation in 2023.

5. Changes in Form 8974:

• Form 8974, attached to 94x forms to claim the qualified small business payroll tax credit for increasing research activities against payroll taxes, has undergone a significant change.
• The ‘Credit’ has been updated to ‘Credit against the employer share of social security tax,’ with the maximum claim amount increased to $500,000 from $250,000.

6. Discontinuation of Forms 941-SS and 941-PR:

• Forms 941-SS and 941-PR will no longer be available after the fourth quarter of 2023.
• Employers in U.S. territories will file Form 941. Alternatively, if preferred in Spanish, a new Form 941 (sp) can be filed.

7. End of Advance Payment of COVID-19 Credits:

• The advance payment of COVID-19 credits has concluded.
• While qualified sick and family leave wages can still be paid in 2023 for leave taken after March 31, 2020, and before October 1, 2021, requesting an advance payment of any credit on Form 7200 is no longer an option.

Who is Required to File Form 941?

Businesses that pay wages to employees, regardless of their structure, must file Form 941 each quarter. This requirement applies to sole proprietors and C corporations as well. Even if a business does not have employees during a particular quarter, filing Form 941 is still mandatory. In such cases, the business is obligated to report that there were no tax withholdings for that specific period.

In general, businesses with employees are obligated to submit Form 941 every quarter, with a few exceptions outlined below:

Receives Notification from IRS to File Form 944: If you have been notified to file Form 944, the Employer’s Annual Federal Tax Return, you must adhere to an annual filing schedule. In such cases, filing Form 941 quarterly is not necessary.

Seasonal Employers: Seasonal employers are exempt from filing Form 941 for quarters in which they have no tax liability due to the absence of wage payments. To communicate this to the IRS, it is essential to mark the designated box on line 18 each quarter when filing Form 941.

Household Employees: Employers of household staff typically do not need to submit Form 941.

Farm Employees: Employers of farm workers are also exempt from filing Form 941 for wages related to agricultural labor.

It is essential to note that Form 941 should not be used to report backup withholding or income tax withholding on non-payroll payments like pensions, annuities, and gambling winnings. Instead, these types of withholdings should be reported on Form 945, the Annual Return of Withheld Federal Income Tax. Similarly, unemployment taxes are reported on Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, and not on Form 941. Understanding these distinctions ensures accurate and compliant reporting to the IRS.

Information Needed to File Form 941

When preparing to file Form 941, it’s essential to gather the following information to ensure accurate and timely reporting:

1. Employer Identification Number (EIN):

• You will need your EIN, a unique identifier for your business, which is used throughout the form.

2. Legal Name and Address:

• The legal name under which you applied for the EIN and your business address are crucial details. Both will be displayed on every page of the form and any accompanying attachments.

3. Wages Paid:

• Record the total wages you have paid to your employees during the reporting period.

4. Employee-Reported Tips:

• Include the tips that your employees reported to you during the specified quarter.

5. Federal Income Tax Withheld:

• Report the amount of federal income tax that you withheld from your employee’s wages.

6. Social Security and Medicare Taxes:

• Provide information on both the employer and employee shares of social security and Medicare taxes.

7. Additional Medicare Tax Withheld:

• Specify any additional Medicare Tax that has been withheld from employees, if applicable.

8. Adjustments to Social Security and Medicare Taxes:

• Include adjustments for the current quarter related to social security and Medicare taxes. This may involve fractions of cents, sick pay, tips, and group-term life insurance.

9. Qualified Small Business Payroll Tax Credit:

• If applicable, report the qualified small business payroll tax credit for increasing research activities.

10. Credit for Qualified Sick and Family Leave Wages:

• Provide details on the credit for qualified sick and family leave wages paid in the current quarter for leave taken after March 31, 2020, and before October 1, 2021.

Deposit of Taxes and Determining Deposit Schedule

You may have to deposit the federal income taxes you withheld and both the employer and employee social security taxes and Medicare taxes.

If your total taxes after adjustments and nonrefundable credits (line 12) are less than $2,500 for the current or prior quarter, and no $100,000 next-day deposit obligation was incurred during the current quarter, you are exempt from making a deposit. To avoid penalties, pay any amount due with a timely filed return or deposit the owed amount by the return’s due date.

If uncertain about the total tax liability, consider making deposits using semi-weekly or monthly rules to prevent failure-to-deposit (FTD) penalties.

How do we determine the Deposit Schedule?

Deposit schedules are not determined by the frequency of employee payments but by the total tax liability reported on Form 941 during the previous 4-quarter lookback period (July 1 of the second preceding calendar year through June 30 of the preceding calendar year). For those who filed Form 944 in 2021 or 2022, the lookback period is the 2021 calendar year.

Annual Review for Deposit Schedule:

• Before each calendar year begins, assess which deposit schedule applies.

Monthly Schedule Depositor:

• If taxes reported during the lookback period are $50,000 or less, you fall under the monthly schedule depositor category.

Semiweekly Schedule Depositor:

• If taxes reported during the lookback period exceed $50,000, you are classified as a semiweekly scheduled depositor.

Filing Deadlines for Form 941:

Form 941 must be filed by the last day of the month that follows the end of the quarter. If the deadline falls on a weekend or holiday, the return is due on the next business day. Additionally, if payroll tax deposits are made on time and in full throughout the quarter, an additional 10 days are granted to complete the form. This changes the deadline to the 10th of the second month following the quarter’s end.

Form 941 Due Dates for 2023 Tax Year:

• January, February, March — 1st Quarter: Due by May 01
• April, May, June — 2nd Quarter: Due by July 31
• July, August, September — 3rd Quarter: Due by October 31
• October, November, December — 4th Quarter: Due by January 31

What happens if I don’t file Form 941 on time?

Filing Form 941 after the designated deadline can result in penalties and interest. It is crucial to file the form by the last day of the month every April, July, October, and January to avoid such consequences.

Late Filing Penalties:

• The penalty for filing Form 941 late is 5% of the tax due with the form for each month, or portion of the month, that the form is overdue.

Where do I file Form 941?

Form 941 can be filed either through paper filing or e-filing. If you prefer the old-school method of filing through paper, download the form, fill it out electronically, and then mail the completed form.

When mailing your form, adhere to these guidelines:

• Utilize a 10-point Courier font if possible.
• Don’t use dollar signs and decimal points; use preprinted decimals on the form.
• Commas are optional.
• If a field’s value is zero, leave it blank, except for lines 1, 2, and 12, where zero must be written.
• For negative numbers, use a minus sign or parentheses if a minus sign isn’t feasible.
• Clearly write your EIN, “Form 941,” and the tax year and quarter on all attachments.
• Staple sheets together in the upper left corner.

You can submit Form 941 electronically, and the IRS strongly recommends this method. Notably, the e-filing threshold has recently decreased from 250 returns to 10 aggregate returns, encouraging more entities to adopt electronic filing.

The IRS highlights these changes to minimize paper returns and improve the efficiency of the tax process. With these updates, e-filing has become not only a convenient but also a necessary approach. Consider utilizing a reliable e-filing solution like TaxBandits to significantly simplify your tax filing process. TaxBandits offers various features, including bulk filing, multiple payment options, internal audit features, and more.

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