Small business owners that have employees also have many payroll tasks to complete, which includes paying FICA taxes on behalf of their employees. FICA, or the federal insurance contributions act, is an important tax that funds key social safety programs like Social Security and Medicare. These programs ensure that the elderly will have a stream of income and healthcare in retirement, respectively. Therefore, all employees and employers pay this tax to keep these programs funded.
Form 941 is used to organize employer FICA tax contributions throughout the year on a quarterly basis. Keep in mind that FICA tax is generally due either semi-weekly or monthly, as this form just allows employers to keep track of payments.
This post will act as a guide on FICA regulations, Form 941, and related topics.
FICA fundamental facts
As mentioned above, FICA or the federal insurance contributions act is used to fund Social Security and Medicare. The current total percentage for this tax is 15.3% (the Social Security tax portion is 12.4% and the remaining 2.9% funds Medicare). An employer pays half of this tax (7.65%) on behalf of the employee with the employee paying the remaining half through paycheck withholdings.
Keep in mind that self-employed people don’t have an employer and are required to pay the entire 15.3% tax. This is referred to as the self-employment tax. Each self-employed person may deduct half of this tax on his or her tax return as an above the line adjustment. Self-employed people also have to pay this tax on a quarterly federal tax return which is also referred to as estimated payments.
It’s also important to note that Social Security only applies to the first $132,900 of wages for a total figure of $8,239.8 for employees. Medicare wages don’t have limits and the 1.45% is assessed on the employee’s total income.
Also, high-income earners need to pay an additional 0.9% surtax to fund Medicare. These limits usually start around the $200,000 mark and can change based on filing status, which is reflected here.
FICA-related taxes like FUTA and SUTA
FUTA & SUTA are similar to FICA and fund an employee’s unemployment insurance fund, which gives a laid-off employee a small stream of income during unemployment.
These taxes are assessed on the first $7,000 of each employee’s wages and are filed on IRS form 940 each year, regardless of the businesses’ number of employees. FUTA tax rates can vary around 6% but timely payments can reduce it to a low figure of only 0.6 %. Some territories like the Virgin Islands must withhold 2.4% of an employee’s wages as this territory is indebted to the US government.
SUTA fluctuates even more than FUTA as each state has its own separate rules. Luckily, most businesses pay minimal SUTA tax if they haven’t had employees file unemployment claims. SUTA rates fluctuate between 2 and 4% with businesses filing these taxes between October and December.
Since SUTA is very intricate, it makes sense to contact the proper agency for assistance. It’s even more crucial to work with a specific state’s unemployment agency since each one has its own distinct policies.
Check out our guide on FICA, FUTA, and SUTA Taxes
Who needs to file form 941?
Every employer that has standard full-time and part-time employees must file this form which reflects withheld income, FICA, and unemployment taxes quarterly. This form records the employer and employee FICA taxes paid, employee wages paid, employee reported tips, and federal income tax withheld.
However, businesses that have contractors don’t have to file this form nor withhold taxes on behalf of those workers.
Independent contractors are considered their own business, making them responsible for their own tax planning. Many companies are hiring contractors instead of employees to save money, which can be a very short-sighted idea. For example, businesses that willingly mislabel employees as contractors can be hit with stiff internal revenue service penalties and fines.
While businesses don’t usually withhold taxes on behalf of contractors, they do have to report their income via form 1099 MISC if they paid an individual contractor more than $600 per year.
Form 941 high-level instructions
Fortunately, this form isn’t as complex as other tax forms like depreciation schedules. Instead, it’s a two-page form that is relatively easy to complete. It’s easier to complete when it’s broken down by section below:
- Page 1: The first information box asks for basic business facts like name, address, contact information, EIN (employer identification number), and the quarter being used to report wages. All of these items are self-explanatory, but it’s wise to pay special attention to the EIN, which is mandatory for businesses that want to hire employees.
- 1a: After the basic information blurb, this form asks for fundamental employee statistics like the number of employees, wages, and federal tax withheld. From there, it helps employers calculate Social Security and Medicare tax by multiplying total wages by each tax percentage as can be seen on line 5b. Line 6 adds total federal income tax withheld and social security along with Medicare Tax.
- 1b: Lines 7-11 account for adjustments like sick pay, group term life, and the business payroll tax credit. Consult IRS publication 15 to learn about each of these adjustments in more detail.
Sick pay and group term life (GTL) are common adjustments for this form. For example, if a third party pays for an employee’s sick pay, this would be included as a negative adjustment on line 8. So an employer that has an employee with $2,000 of sick pay taxes that had a third party withhold $1,000 of that amount, could include a negative $1,000 adjustment.
Most employers offer their employees standard group term life policies with employees being taxed on the premiums paid for policies greater than $50,000. Any instance that involves employees being taxed on employer-paid benefits is called imputed income. Also, the employer can take the employee share of paid taxes as a negative adjustment on line 9.
Business payroll credit
The business payroll tax credit stands out from this list as it helps companies like startups deduct Research and development (R&D) expenses against the employer portion of FICA tax. Startups generally have small income tax liabilities or operate at a loss. These companies also have significant research & development (R&D) expenses, which is why this credit is very helpful. It also incentivizes innovation in the tech field as well.
After all these taxes and adjustments are aggregated, the business will either break even, owe a balance, or be entitled to a refund. If they paid the exact amount, this results in a break-even scenario with them owing nothing.
Balances result from not paying enough in taxes and refunds can be triggered by overpayments and substantial adjustments. Refunds can be good depending on the business situation, but frequent overpayment can also be seen as an interest-free loan to the government. The over withheld funds could have been used to invest or grow the business, but the government doesn’t pay interest on those funds.
The back page of form 941 is shorter than the first and goes into more detail regarding business pay structure, closures, and third parties. Line 16 breaks down if the business withheld on a monthly or semi-weekly standard. Monthly withholders can simply put the amounts withheld per month in each space as they will add up to the quarter amount.
Conversely, semi-weekly withholders have to fill out the supplemental form 941 schedule B and attach it to the main form.
Lines 17 & 18 also have sections that require businesses to report if they closed during the year or fired all employees. It also has an area that seasonal businesses like a snowboard shop can report the nature of their businesses. Seasonal businesses usually close down during off-seasons and this is reflected in this area.
The last line prior to the signature area allows business owners to mention any 3rd party representatives like a tax preparer or CPA to discuss this form with the IRS on the business owner’s behalf. It’s not necessary to include a third party designee for this form or an employer’s quarterly federal tax return, but it can be helpful in case of an audit.
Form 941 is somewhat straightforward to complete but can be daunting for some. Thus, it’s wise to use payroll software that can automate this procedure, which includes submitting it to the government via e-file.
Important FICA and Form 941 penalties
Like many related tax concepts, the IRS levies penalties for late filing and other non-compliance. Filing form 941 and FICA tax are no exception to this and there are some important rules to know:
FICA tax penalties:
|Tax Deposits made 1-5 days late||2%|
|Tax Deposits made 6-15 days late||5%|
|Tax Deposits made 16 or more days late,
but prior to 10 days from the first date of first IRS payment notice
|Amounts that were paid directly to the IRS or paid with form 941 that should have been deposited.||10%|
|Amounts that are unpaid more than 10 days after the first IRS payment notice or the earlier of the date the business owner received the notice demanding payment||15%|
Form 941 penalties
A failure to file penalty of 5% of the unpaid tax due with be assessed for each month the form hasn’t been filed. The highest penalty is usually 25% of the total tax.
If there is a balance that should have been paid with the return like outstanding employer FICA payments, there’s an FTP penalty of 0.5% per month of the amount of tax. This penalty is also charged each month that the payment is late and the maximum penalty is 25% of the total tax as well.
Important dates to remember
There are many important dates to remember which include estimated tax payment due dates, form 941 due dates and more.
Estimated tax payments:
These are filed each year by businesses, contractors, and other self-employed individuals. Dates can vary based on the year, especially if the 15 of each month falls on a holiday or weekend.
Changing dates can be found on the IRS website and taxpayers can use form 1040ES to pay these taxes.
Form 941 due dates:
Like estimated payment dates, these can fluctuate by the year and are updated on the IRS website.
Both tax payments have similar, yet different dates, which makes it important to keep track of them.
- Gusto: This payroll software enables employers to automate form filling and tax payments. It can be a great alternative to manually filling out these forms, by saving time and money. This platform also assists business owners with related tasks like creating 1099s, managing employee benefits, and other HR tasks.
- Top 10 accounting software platform reviews: Besides Gusto, there are also other alternative software choices that provide both payroll and accounting services. This comprehensive guide walks through the most popular options like Quickbooks and Sage accounting.
- IRS Publication 15: This IRS publication is over 17 pages long and is an all-encompassing guide to taxes for employers. Employers have more responsibility for tax issues compared to employees. Therefore, they can learn about the intricacies of form 941, W-4s, wage bases, and other important tax topics.
FICA is one, if not the most important tax that employers must thoroughly know. This key tax funds Social Security, Medicare, and assesses a higher percentage than similar taxes like FUTA & SUTA.
It can be tough to track this tax, but there are many resources like Gusto payroll software that can help businesses automate most FICA procedures.
Also, employers must use form 941 to track their FICA payments on a quarterly basis. Therefore, it’s imperative to learn how to file this form correctly, which could include hiring an accountant. Prior to doing this, consider using a comprehensive guide like this post as an educational resource on FICA, resources, penalties to avoid, and how to properly fill out form 941.
Disclaimer: This post is not tax advice, but education. Consult a CPA or tax advisor for tax advice.