Learn how to avail specific tax credits and get the relief your business needs. Read tips on how to properly file your employment tax returns with Rush Tax Resolution.
Businesses must file quarterly or annual tax returns detailing what and how their employees were paid, and report wages withheld for payroll tax purposes (for Social Security and Medicare). This means both the employee portion (withheld from wages) and employer portion.
There are several forms to consider when filing employment tax returns. Business owners must make sure to file the right one. The IRS issues harsh payroll tax consequences for failing to file, and audits returns that don’t match the information they received from employee tax returns and third parties.
Use the Right Form When Filing Returns
Some small businesses pay employment tax once a year. Others must pay on a quarterly basis. Businesses file either Form 941 or Form 944 based on how they file employment taxes. These should not be used interchangeably. There are designated filing requirements for both forms.
Form 941
This is the Employer’s Quarterly Federal Tax Return. It is used to report:
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- Payroll taxes
- Taxes withheld from employee wages
- Income taxes on a quarterly basis (every three months)
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The IRS may specifically advise an employer to file quarterly.
Form 944
This is the Employer’s Annual Federal Tax Return. It is used to report the same taxes as Form 941, if the total amount of calculated tax owed is $1,000 or less.
This form cannot be used unless the IRS provides an official notification to a business that they are eligible to use it. When a business’s tax liabilities expand, said business can switch to Form 941 if the IRS sends a notification that they are eligible for that form now, instead.
Again, it’s important that you continue to file the form the IRS notifies you about, until you receive a newer notification stating otherwise, regardless of the tax you owe. The IRS may notify you about filing the other form next year/quarter if your current tax liabilities do not match the form you have filed.
It should be noted that both Form 941 and Form 944 were changed in 2020 to integrate coronavirus-related tax relief, specifically payroll tax deferral options. Be sure to contact your tax professional about COVID-19 related tax relief if your business and/or employees chose to defer taxes last year. These forms are also used to report and qualify for other employer tax relief options, including the Sick and Family Leave Tax Credit, and the Employee Retention Tax Credit.
If You Fail to File the Right Return, the IRS Can File One for You
As with individual returns, the IRS can make employment tax returns (and other business returns) for you, utilizing information provided through your previous tax returns, employee taxes, and third-party information returns. This is called a Substitute for Return.
These estimated returns will be less kind to your bottom line than any return you might draft yourself, so it should be mentioned that there is a significant downside in letting the IRS file for you. Additionally, there are steep penalties and consequences for failing to file.
There Are Penalties for Failing to File Employment Tax Returns
Your business will incur a penalty of 5 percent of the due tax on the first late month, and an additional 5 percent each month, up to 5 months (25 percent). These are separate from penalties incurred for being late on estimated payments or having a tax debt (due to the results of an examination/audit).
Late business and employment tax returns are given additional scrutiny, so you should take additional care when preparing them. Consider seeking help from a tax professional to make sure you are as meticulous with your paperwork as possible and aren’t giving the IRS any reasons to further audit your business.
Once you do file a return (or after the fifth month), the IRS will inform you of the balance due on your business’s account via a CP161 notice. Your debt to the IRS will be assessed, and you will be given a deadline to pay.
There are further penalties (failure to pay penalties) for failing to meet that deadline, as well as interest on any due balance. The penalties for failing to pay are 0.5 percent of the unpaid amount per month. Penalties may increase or decrease based on whether the IRS has issued a tax lien against your business (which it can), or whether you have entered into a payment plan with the IRS.
The IRS Can (and Does) Audit Employment Tax Returns
Just like individual tax returns, the IRS can audit business tax returns, including employment tax returns, if they have information that leads them to believe the returns and associated payments are incorrect. The IRS determines if an examination (an audit) is needed based on two major factors:
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- Computer programs. The IRS utilizes computer programs to determine the likelihood of an employment tax returns legitimacy based on the business’s previous returns, information returns by other organizations, data compiled through studies of other returns, and more.
- Compliance projects. These are data sets compiled through public and news media, as well as other sources of information to cross reference individual and corporate returns, to find returns that qualify for an audit.
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Once the IRS completes its examination, it either decides that you owe additional taxes, it owes your business a refund, or that no change will occur on your business’s tax account.
With the option to defer both your portion and employee portions of the social security (payroll) tax available in 2020, and recent changes in how and when those deferred taxes are due, navigating employment taxes in 2021 can be a little complicated.
Experienced tax professionals can help answer all your questions about business taxes in the new year and keep you up to speed on deferred tax deadlines, employment tax returns, filing requirements, and much more. Tax professionals can also help you accurately file your business back taxes and compile all the information needed for a late return. Learn how to avail specific tax credits and get the relief your business needs through a tax professional at Rush Tax Resolution.
