As a business owner, you are required to make friends with employment taxes – that means reporting and depositing them on a quarterly basis with Form 941, and a yearly basis with Form 944. Both forms include federal income tax withheld from your employees, as well as the employer and employee’s’ shares of social security and Medicare taxes. The lowdown is below.
These forms are important to follow the law of course, but the amount also determines your deposit schedule, whether it’s monthly or weekly.
If your liability from the current and/or previous quarter is under $2,500, you may pay the taxes for the year with your filed return instead of making deposits. This is under the presumption that you do not incur a $100,000 deposit obligation during the quarter. Similar rules apply for Form 944. If your liability is $2,500 or higher, you must make deposits, unless you are eligible to make payments with your return. If you are not sure about your tax liability, but you are typically a 941 filer, make deposits using the semi-weekly or monthly deposit option to avoid failure-to-deposit penalties.
How do you know when to deposit? You must follow either the semi-weekly or monthly deposit schedule. Your current calendar year schedule depends on the amount of taxes paid last year, or your lookback period. If you only file Form 941, your lookback period is 12 months, covering four quarters that ends on June 30th. If you file Form 944, the lookback period is the second prior calendar year. A monthly schedule is for businesses that pay taxes of $50,000 or less, while a semi-weekly is for those paying higher than that amount. For a monthly schedule, payments are made on the 15th or sooner for the previous month. For semi-weekly, your deposit day depends on your payday; Wednesday to Friday paydays must be deposited by the following Wednesday, and if your payday is Saturday through Tuesday, deposits are to made the following Friday.
There’s also a next day deposit rule – if you ever accrue taxes meeting or exceeding $100,000 on any given day, you must make a deposit the next business day. This also means your schedule becomes semi-weekly for at least the remainder of the calendar year and the following year. As a new employer, you are on a monthly schedule until this applies, or your first year amounts to $50,000 or more, to transition to a semi-weekly schedule during your second year.
Now how to make the deposits – fortunately, all are taken electronically, using a system called EFTPS. These deposits can be made by a third party, such as a tax professional or payroll service.
Forms 941 and 944 are essential to running your business by the books, whether you’re just starting out or in the big leagues. Filing these forms is as, and possibly more important, than filing your personal tax return; many businesses have failed due to negligence pertaining to reporting and depositing. In addition to filing, and like all failure-to-pay instances with the IRS, penalties will apply if you fail to make 100% of your tax liability deposits. Make sure your tax professional or payroll service is entrusted to comply by your obligations as a business owner, and consider it a foundational block of your successful business.