Form 941, Take 2
By Cora M. Barnhart • Bankrate.com

Here's one popularity contest you don't want to win.

Small-business owners have selected Form 941, the Employer's Quarterly Federal Tax Return, as the least popular tax form. Last week's tax tip walked you through the first four lines of this form. This week's tax tip attacks lines 5 through 9, as taxpayers find themselves wrestling with adjustments.

Adjusting the total of income tax withheld -- Line 5
Did the hoopla over whether we are actually in the next millennium distract you so much that you goofed in withholding taxes? Line 4 provided the chance to straighten things out. Once you reach line 5, it's time to decide on the bottom line in terms of income tax withheld.

Are you reporting additional income tax withheld for an earlier quarter? Add line 4 to line 3. Reduce the amount of income tax withheld by subtracting line 4 from line 3. If you are perfect, at least to the extent that you didn't need to make any adjustments here, lines 5 and 3 will be the same.

Taxable Social Security wages and tips -- Lines 6a and 6c
The key here is "taxable." What you want to enter on this line are wages you paid your employees during the quarter that are subject to Social Security taxes. This means you should include any sick pay and taxable fringe benefits subject to Social Security taxes. This should be the amount before deductions, but it shouldn't include tips.

Also, once your employee's wages total $76,200 for this year, quit taking out Social Security taxes. (And to keep things on the tax front exciting, this particular income threshold does include tips). However, the fact that you stop reporting wages for Social Security purposes shouldn't prevent you from withholding income tax for the remainder of the year. Also, notice that the instructions for line 7a warn that there isn't a limit on the amount of wages subject to Medicare tax.

Now you've reached line 6c and you're stuck. What's this about tips? The IRS wants to know the amount of tip income your employees reported during the quarter. Their interest extends to anyone who hasn't reached the $76,200 threshold for this year.

Employees are supposed to report tips totaling $20 or more in a month by the 10th of the following month. They can take care of this with either Form 4070, Employee's Report of Tips to Employer, or a written statement.

A confusing topic that can come up for restaurant owners is allocated tip income. Allocated tips are tips that an employer assigns to an employee in addition to the tips reported to the employer. Don't report these on Line 6c. Instead, report them on Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips. And, in case they claim they didn't know, this information will appear in box 8 of their Form W-2.

Adjusting Social Security and Medicare taxes -- Line 9
There are times where employers must adjust the amounts reported as Social Security and Medicare taxes on lines 6b, 6d, and 7b. It's the only way they can calculate their correct tax liability. The adjustments can be the result of current or previous circumstances.

One common reason employers make entries on this line is sick pay. They would enter this adjustment, including fractions of cents involved, on the corresponding section of line 9. If they have any other adjustments described by the instructions in this area, these go in the "Other" entry space. They should also include a written explanation clarifying any adjustments reported in the "Other" entry space.

Line 9 also corrects errors in Social Security and Medicare taxes reported on an earlier return. Adjustments pertaining to earlier returns take more work, though. First of all, they change tax liability. This requires the taxpayer to remember these adjustments once he reaches line 17, Monthly Summary of Federal Tax Liability, or on Schedule B (Form 941).

These latter adjustments also require an explanation. Employers can take care of this by filing Form 941C along with Form 941. The IRS will also accept a statement that provides relevant information about the adjustment(s). Make sure the statement is included with Form 941.

If these adjustments also mean adjusting an employee's Social Security or Medicare wages or tips for a prior year, there's still a little more work to do. You have some more forms to track down. File Form W-2c, Corrected Wage and Tax Statement, with Form W-3c, Transmittal of Corrected Wage and Tax Statements.

And put your feet up until next week.

-- Posted: May 5, 2000