Hiring an employee and running your first payroll run represents a big step for every small business—and like every new stage of business, it comes with its own host of new responsibilities and complexities.
New employers have to figure out payroll forms and employment taxes, and there are surprisingly few good resources out there to help. Maybe you Googled a few of your questions or scrolled through the Internal Revenue Service’s (IRS) website, but you’re still feeling confused and unsure.
Never fret! We’re here to demystify the world of payroll, taxes, and IRS forms that come along with hiring your first employee.
In this guide, we’re explaining IRS Form 941, the Employer's Quarterly Federal Tax Return, including:
- What Form 941 is
- Why the IRS requires employers to file it
- How to figure out if you need to file Form 941
- When and how to fill out and file Form 941
What is Form 941?
If you’re in a rush, here’s the gist:
- What’s reported on Form 941: Income and FICA tax withholding, plus the employer’s share
- When it’s filed: Quarterly
- Who needs to file: Most employers in the U.S.
Form 941, in a nutshell, is a document the IRS requires employers to file quarterly. It’s designed to help the IRS and employers, themselves, figure out how much income tax and Federal Insurance Contribution Act (FICA) tax a small business owes to the federal government, on a quarterly basis.
On Form 941, businesses report the income, Social Security, and Medicare taxes they withheld from employee paychecks over the course of the quarter. Since FICA taxes are split between the employee and employer, Form 941 also includes the employer’s own share of those Social Security and Medicare taxes (more on shared taxes later).
How is Form 941 different from Form 940?
Small businesses and employers are required to file a number of payroll tax forms to the IRS, so it’s easy to confuse them. Forms 940 and 941 are similar in that they’re both used to calculate and report taxes owed by an employer to the federal government. Form 941, however, needs to be filed every quarter and it reports on withholding and shared taxes.
Form 940 is filed only once per year and, instead, reports an employer’s Federal Unemployment (FUTA) tax. Here’s another way to look at it: Form 940 reports employer-only taxes, while Form 941 reports income withholding and shared taxes (those split between the employer and employee).
How is Form 941 different from Form 944?
Forms 941 and 944 are even more similar—both are used to report FICA and income tax withholding to the IRS. The key difference here hinges on how much tax your small business owes for the year.
Whereas Form 941 is filed quarterly by most employers, small businesses whose annual FICA and withholding taxes are less than $1,000 file Form 944 instead, and they do so only once per year.
Why the IRS requires employers to file Form 941
Form 941 is one IRS form that deals with taxes most people in the U.S. are familiar with. Whether as an employee or an employer, you’ve likely dealt with income tax withholding and seen Federal Insurance (FICA) taxes withheld from paychecks.
While income taxes are paid by the employee, employers are responsible for withholding this tax and depositing it with the federal government. Employers are also responsible for paying 50% of FICA tax and withholding the other 50% from their employees’ paychecks.
To keep track of how much income and FICA tax employers withhold, and how much they owe for their share of FICA tax, the IRS uses Form 941 and requires most employers to file it every quarter. The form helps both the IRS and the employer stay on top of taxes withheld, owed, and paid throughout the year—simplifying the year-end tax return.
Wait—what are withholding and FICA taxes anyway?
Let’s take a step back real quick. While many of us have heard of income tax withholding and FICA, you may not have a super clear understanding of what they entail. In the payroll and employment world, there are three main types of tax:
- Withholding taxes: These are taxes your employee’s pay on their income—both the standard income tax and their portion of FICA taxes. You’re responsible for withholding these taxes from employee paychecks and depositing them to the correct tax authority. These are part of what’s reported on Form 941.
- Employer taxes: As the name implies, you, the employer, are responsible for paying the entirety of these taxes.
- Shared taxes: These taxes are split between you and your employees and include Social Security and Medicare taxes (or FICA). These are also reported on Form 941. Again, it’s your responsibility to withhold the employee’s portion and deposit the full amount (your portion and theirs) to the appropriate tax authority.
Income taxes represent the bulk of the IRS tax base while FICA taxes pay into social safety net programs like Social Security and Medicare. Since each employee’s income tax rate will vary based on their annual income, qualified dependents, personal preference, and other factors, you’ll need to collect a W-4 form annually from each employee. This form will tell you how much income tax to deduct from their paycheck.
Standard FICA taxes for 2019 total 7.65% for each party, the employer and employee. The breakdown looks like this:
- 6.2% Social Security tax (sometimes called OASDI)
- 1.45% Medicare tax
The Social Security tax only applies to the first $132,900 an employee earns (for 2019). After that, no more Social Security tax is incurred by either the employee or employer. On the flipside, employees earning more than a set annual income incur an additional 0.9% Medicare tax on any earnings over $200,000 for those filing as single or $250,000 for those filing jointly with a spouse. It’s important to note that the additional Medicare tax is paid only by the employee and not the employer.
Do I need to submit Form 941?
Now let’s answer that most burning of questions: Do you need to submit Form 941? If you’re an employer in the United States, chances are, the answer is yes. The vast majority of businesses with one or more W-2 employees are required to submit Form 941 quarterly.
- Paid wages to a W-2 employee (Note: not a contractor) AND
- Owe more than $1,000 in withholding and FICA taxes annually
You’re required to file Form 941.
There are, however, a few exceptions to make note of. As Fundera highlights, “businesses that hire only farmworkers and people who hire household employees, such as maids or nannies” do not need to file Form 941.
In addition, for seasonal businesses, you’re only required to submit Form 941 for the quarters in which you actually paid wages. So, for example, if you run an ecommerce gift shop that hires employees only during the winter holiday season, you likely won’t need to file Form 941 for Quarter 2 (April through June).
If you expect your withholding and FICA tax liability for the year to fall below $1,000, you can contact the IRS to get permission to file Form 944 annually instead.
How to fill out Form 941
For those employers who do have to file Form 941, let’s get down to the how and when. Before we get started, you should have a few pieces of information handy:
- The current FICA tax rates: As of 2019, the Social Security tax rate is 6.2% and the Medicare tax rate is 1.45%—making a combined FICA tax rate of 7.65% from the employee and 7.65% from the employer. To put it another way, Social Security tax is 12.4% total and Medicare tax is 2.9% in total.
- The maximum Social Security threshold: For 2019, both the employer and employee only pay Social Security tax on the first $132,900 an employee earns.
- The Additional Medicare tax rate and threshold: The additional Medicare tax rate is 0.9% and applies as an employee-only tax for single filers earning more than $200,000 per year or joint filers earning more than $250,000 annually.
- The number of employees you had during the quarter
- Total wages paid to employees
- Taxable Social Security and Medicare wages for the quarter
- The total amount withheld from employee pay
Calculating how much tax you owe
Calculating your tax liability for the given quarter is basically the whole point of Form 941, and by following the step-by-step instructions for filling it out, you’ll be able to figure out what you owe for the quarter.
Since Form 941 includes a few different types of tax, the formula for finding your tax liability is a little more complex—so we’ll break it down into 4 parts.
- The formula for income tax withholding looks like this: [Employee’s tax rate] x [total wages paid for the quarter]. So if your employee files their taxes as single and earns $50,000 annually, they fall into the 22% tax bracket and earn $12,500 in gross pay each quarter. So the income tax you withhold and must forward on to the IRS is 22% x $12,500 = $2,750.
- The formula for Social Security tax looks like this: [12.4% total Social Security tax rate] x [# of employees] x [wages up to $132,900 per employee]. For example, let’s assume you employ 5 people at the same salary as our previous example—$50,000 per year. The Social Security tax you owe looks like this: 12.4% x 5 employees x $12,500 = $7,750.
- The formula for Medicare tax looks like this: [2.9% total Medicare tax rate] x [Total taxable wages]. Using the same example as before, your Medicare tax liability looks like this: 2.9% x $62,500 taxable wages paid = $1,812.50.
- So to sum up, you can find your total FICA tax owed for the quarter by adding those last two numbers: $7,750 + $1,812.50 = $9,562.50.
The good news is that most payroll systems (including Wave) will do all of this calculation for you, so you can quickly and easily pull up numbers like total wages paid, income tax withheld, and taxable Social Security and Medicare wages—without all the math.
When to submit Form 941
IRS Form 941 is a quarterly filing. That means the IRS requires employers to complete and file it 4 times a year, along with making the quarterly tax payments that come along with it. For the vast majority of small businesses, Form 941 is due on:
- January 31st (for Quarter 4 of the prior year—October through December)
- April 30th (for Quarter 1—January through March)
- July 31st (for Quarter 2—April through June)
- October 31st (for Quarter 3—July through September)
How to submit Form 941 and make your FICA and income withholding tax payments
When it comes to submitting Form 941 and making your quarterly tax payments, small businesses have a few options to choose from:
- E-file and pay online
- Mail in your form and payments
- Work with an account to file for you
- Any combination of the above
E-file and pay online
The IRS touts e-filing as the faster, more accurate, and more secure way to file and pay quarterly taxes.
To file Form 941 (or any IRS form, for that matter) online, you’ll need to choose either tax software or to work with an authorized e-file tax professional. You can find a list of IRS-approved software here and authorized e-file providers here.
To pay your quarterly Form 941 tax balance and make your monthly or semi-weekly deposits online, you’ll use the Electronic Federal Tax Payment System (EFTPS).
If you’re working with a tax software or professional, the IRS recommends you make your payments via Electronic Funds Withdrawal (or EFW). With this option, you can e-file and authorize payment in one step.
Mail in your form and payment
While the IRS prefers and recommends online filing, small businesses also have the option of mailing in Form 941 along with corresponding tax payments.
To mail in your form and payment, print both Form 941 and Form 941-V, the payment voucher. Mail these, along with your payment, to the address listed for your state. You can find the correct mailing address on page 6 of the Instructions for Form 941.
Work with an accountant to file for you
Your last option for filing Form 941 and any outstanding payments or deposits is to work with an accountant or other tax professional who can file both the form and payment for you. Typically, this is done via the Electronic Funds Withdrawal (EFW) system we mentioned above.
Phew, that was a lot. To sum up, here are the basic takeaways the average employer needs to keep in mind about IRS Form 941:
- Form 941 reports the amount of income tax withholding and Federal Insurance Contributions Act (FICA) tax an employer is responsible for paying
- The vast majority of employers who’ve had one or more W-2 employees over the course of the prior quarter are required to file Form 941