Understanding the Importance of Form 941 in Payroll Tax Compliance: What Businesses Should Know

Introduction

It’s time! The deadline for the first quarter of Form 941 is fast approaching, and businesses must prepare to meet this critical tax obligation. The IRS has implemented several updates to Form 941, making it essential for businesses to understand these changes for payroll tax compliance. In this blog, we will provide a comprehensive overview of Form 941 and its recent changes to help your business stay compliant and avoid any potential issues.

Form-941 (Employers Quarterly Federal Tax Return)

Form 941 – The Employer’s Quarterly Federal tax return is an IRS form used by employers to report their Social Security and Medicare taxes and federal income taxes withheld from the employee’s paycheck. The businesses are required to file this form each quarter.

Who Needs to File Form 941? 

Employers or proprietors who operate their organization with employees must file IRS Form 941 if the employees are paid taxable wages. It is mandated for employers to report the Social Security and Medicare tax that they withhold from their employee’s paychecks. Employers must continue submitting the report for every quarter if the company owes more than $1000 in Social Security and Medicare tax and income taxes.

NOTE: 

Employers in the following categories are exempt from reporting Form 941:

• Seasonal employers
• The business that hires only farm workers
• Those who hire household workers like housekeepers, maids, etc.

What information is required for reporting on Form 941?

• Number of employees
• Wages paid to employees
• Adjustments made for tips and group insurance 
• Federal income tax withheld
• Social Security tax
• Medicare tax

New Updates to Form-941 for the 2024 Tax Year:

The IRS has released an updated Form 941 with new changes for the current tax year 2024 mentioned as follows:

1) Updates regarding Social Security and Medicare tax

• The medicare tax remains unchanged and there are no wage base limits for Medicare taxes.
• The Social Security wage base limit is increased for the current tax year 2024 from $160,200 (2023) to $168,600(2024). 
• If employers pay more than $2,700 for household employee wages, they are subject to Social Security and Medicare taxes.
• If election workers receive $2,300 or more in cash, they are subject to Social Security and Medicare taxes in 2024.

2) Updates regarding COVID-19 related credits: 

• Employers that claimed sick leave and family leave wages between March 31, 2020, and October 1, 2021 can claim a tax credit.
• Some of the specific lines have been removed from form-941 after December 31, 2023.
• To claim any wages paid based on this rule, employers should fill out Form 941-X. However, do not fill out Form 941-X before filing Form 941.

3)Termination of Form-941-SS & Form-941-PR

• Form 941-SS-Employer’s Quarterly Federal Tax Return and  Form 941-PR-Planilla para la Declaración Federal TRIMESTRAL del Patrono have been terminated from Form-941. Instead, employers in U.S. territories can file the new form (Form 941-SP) which contains instructions in Spanish language.

4)Termination of Publications- 51, 80, and 179 from 2024

• Publication 51- Agricultural Employer’s Tax Guide, Publication 80-Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands, and Publication 179-Guía Contributiva Federal para Patronos Puertorriqueños have been terminated from December 31, 2024. Information regarding the agricultural employers and employers in the U.S. territories is listed in publication 15.
• New publication 15(sp) – The Spanish language version has been released for 2024.

5) Payroll tax credit for specific tax-exempt organizations affected by qualified disasters.

• Specific tax-exempt organizations affected by qualified disasters (except COVID-19)can claim their tax credit. To claim the credit use Form 5884-D (Employee Retention Credit for Certain Tax-Exempt Organizations Affected by Qualified Disasters) after filing Form 941. 

What is Form 941 Schedule B?

Form 941 Schedule B is the IRS tax form for reporting tax liability for semiweekly scheduled depositors. This applies if your reported employee taxes in the lookback period exceed $50,000 or if the tax liability is more than $100,000 during the tax year.

Semi-weekly schedule

Employers who report tax liability of more than $50,000 during the lookback period are considered as semi-weekly depositors. To determine you are a semi-weekly depositor you must understand the “Look back period”.

 Lookback period

• The lookback period refers to the time frame used to figure out the tax liability for the entire year.

For example: The IRS uses a lookback period (July-June) to calculate the employment tax liability For example, if you want to determine your deposit schedule for 2024, you would calculate your tax liability from July 1, 2022, to June 30, 2023.

• If the tax liabilities of an employer are less than $50,000 during the lookback period then it comes under the monthly deposit schedule. When it exceeds $50,000, they come under a semi-weekly deposit schedule.

Deadlines for Form-941

Employers are required to file Form 941 before the deadline to maintain compliance. The deadline typically falls on the last day of the month following the end of the quarter. The deadlines for each quarter are listed here 

Quarters & Reporting period	941-Deadline
Quarter 1 – Jan, Feb, Mar	Apr 30, 2024
Quarter 2 – Apr, May, June	Jul 31, 2024
Quarter 3 – July, Aug, Sep	Oct 31, 2024
Quarter 4 – Oct, Nov, Dec	Jan 31, 2024

If any of these deadlines fall on the weekend or a federal holiday, the deadline shifts to the next business day. Failing to file the Form 941 by the deadline could result in IRS penalties.

Penalties for failing to file form-941

• Initial penalties – The initial penalty ranges from 5% when you fail to file form 941.
• Additional penalties -If your business continuously fails to file, an additional 5% penalty will be declared for every month for up to 5 months.
• Interest for a continued penalty – If the business is not filed within 5 months interest amount will be imposed on the total earned penalty.
• Late payment penalty – If the business fails to make payments to the IRS, the penalty ranges from 2% – 15%.

Final Wrap-up 

Filing Form-941 is crucial for employers to maintain compliance with federal tax obligations. It enables you to report and pay employment taxes every quarter. By understanding the overall aspects of Form 941 helps to ensure compliance and avoid penalties. In order to have a smooth filing process choose an IRS authorized provider like TaxBandits to file 941 online.  Get started today to stay compliant with the IRS and avoid potential penalties.  

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