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Lesson 1 in filling out Form 941, the employer's quarterly migraine

The perils of Form 941Every three months, employers must file IRS Form 941, Employer's Quarterly Federal Tax Return.

It's required of all employers who pay wages subject to income tax withholding or Social Security and Medicare. Its purpose is straightforward -- to report and pay business taxes for the quarter -- but the form itself isn't.

When the U.S. Senate Small Business Committee held an online "Paperwork Unpopularity Poll," Form 941 came in first among all business-related forms. As one business person griped, "Even with business software, the IRS rules surrounding this form are so complicated it makes my head spin!"

Because so many business owners find the instructions baffling, we'll take a line-by-line look at it for the next three weeks.

This week's tax tip looks at the start of the form and its first four lines.

Seasonal employer's checkbox
If you only hire workers for a season, make sure to check the box on the page just above Line 1. That signals the IRS not to expect a report from you every quarter.

Line 1 -- Number of employees
Yes, it's what it sounds like. Uncle Sam wants to know how many employees were on your payroll for the quarter, so start counting. But he isn't interested in household employees, pensioners or anyone else your business didn't pay this period.

By the way, if this number winds up at 250 or more, you will have to file W-2 forms on magnetic media. Call the Social Security Administration at 1-800-772-1213 for more information on magnetic media filing requirements.

Line 2 -- Wages and tips, plus other compensation
Things get a little tougher here. It's time to break out the calculator and start tallying wages.

Make sure you also include any tips reported by your employees, taxable fringe benefits and other paid compensation you provided your employees. If your insurance carrier mentions how much in sick pay it shelled out to your employees, include that amount right here.

Don't get bogged down in whether you withheld income, Social Security or Medicare taxes. That will be accounted for later.

You can leave out supplemental unemployment compensation benefits, even if you withheld income tax on them. Also, don't include any contributions to employee plans if these are excluded from the employee's wages. Examples of these would be retirement programs such as section 401(k) and 125 plans. And if your business happens to be an insurance company, this entry shouldn't include any sick pay you paid your policyholders' employees.

Line 3 -- Total income tax withheld
Here is where you report all the income taxes you have been withholding. Make sure you include withholding from wages, tips, taxable fringe benefits and supplemental unemployment compensation benefits. Insurance companies should remember to include any income tax withheld on third-party sick pay.

Line 4 -- Adjusting withheld income tax
Even the best intentions go awry. It's easy to make a mistake when withholding income taxes from wages. It isn't the end of the world, though. If you committed this error earlier this calendar year, Line 4 provides the opportunity to straighten things out.

Keep two things in mind. First, any corrections reported here change your tax liability. You will have to take care of this on line 17, Monthly Summary of Federal Tax Liability, or on Schedule B (Form 941), Employer's Record of Federal Tax Liability. Explain any adjustments on Form 941C: Supporting Statement To Correct Information or an equivalent statement.

Second, line 4 is limited to adjusting the current calendar year. The reason? Your employees have filed their income tax returns, and they relied on whatever amount appeared on their Form W-2. If you attempt to correct a mistake from a previous year's goof-up here, it could snowball into a mess for your employees' taxes as well.

For more information, see the IRS' instructions on filing Form 941, which is part of its Employer's Tax Guide.

-- Posted: April 27, 2000

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See Also
Part 2: Form 941
Part 3: Form 941


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