If you are a small business that withholds both income and payroll taxes from your employees’ paychecks, that means that you are responsible for reporting that withheld money to the IRS.
Most small businesses do this by using IRS Form 941 quarterly. However, if your small business has an annual payroll tax liability of $1,000 or less, then you can use Form 944, which only needs to be filed once a year. This form is known as the Employer’s Annual Federal Tax Return.
If this sounds like something that would fit your small business, read on for our complete guide to this important form.
Why Form 944 Is So Important
This form is a vital part of your small business taxes because it is the IRS tax form that reports all the taxes that you’ve withheld from your employees’ paychecks.
These taxes include:
- Federal income tax
- Social security tax
- Medicare tax
As a small business, you are bound by the law the report taxes withheld from your employees, and if your business has a tax liability of $1,000 or less, then you can use Form 944 to do so.
In other words, this means that if your employee wages for the year are $4,000 or less, you are eligible to fill out form 944. If your employee wages are expected to be more than $4,000 then you’ll have to file Form 941 every quarter.
Because the amount of tax liability is much lower, Form 944 only needs to be filed once a year. This form is meant for small businesses with very few employees and therefore less tax liability. It is a fairly quick and painless form to fill out but is necessary to do.
If you are eligible for Form 944 and you fail to file it, then you suffer some consequences.
By not getting the form completed and filed in time, your business incurs a 5% penalty of the total tax amount due. If the form still isn’t submitted, an additional 5% penalty will be applied for each month following where it doesn’t come in, up to five months.
Also, if you didn’t file the form and also didn’t pay your tax bill, you will be charged 0.5% of the unpaid tax amount. This number will increase every month that your tax bill goes unpaid and will increase to 1% 10 days after receiving the IRS notice.
To avoid fines, fees, and confusion, take a look at Form 944 early on and make sure you understand it. Add it to your list of “to-dos” for taxes and make sure that you don’t skip out on completing and filing this important form.
Quick Tips to Improve Form 944 Today
Given the importance of Form 944, we think it may be helpful to provide you with some tips to ensure that you fill out this form as accurately as possible.
Read on for our list of quick tips you can implement today to make life with Form 944 easier.
Tip #1: Know Your Eligibility
Before you dive into filling out Form 944, make sure that this is the right form for you.
Form 944 is meant for small businesses but doesn’t work across the board for all small businesses. This form is used by a very specific type of small business: one that has an annual tax liability of $1,000 or less.
To put it another way, Form 944 is intended for small businesses whose employee wages are less than $4,000 for the year. So, if you are a company with a handful of full-time employees, then Form 944 isn’t for you. Instead, you’ll use Form 941.
If your liability for Social Security, Medicare, and withheld federal income taxes is $1,000 or less, then you are eligible for this form.
However, it is important to note that you must get a confirmation of your eligibility for this form in writing from the IRS. You cannot just assume you need to fill it out and do so. If you think your tax liability deems you eligible for Form 944 and you haven’t heard from the IRS yet, you can reach out to them to request it. They should then send you the written confirmation if they determine you indeed are eligible to fill it out.
Tip #2: Incorporate An Online Payroll Service
To ensure that you have the most accurate records on hand to use in filing Form 944 accurately, we highly suggest incorporating an online payroll service into your business.
This is a reliable solution for your payroll and allows you access to all the information you need to get your taxes done correctly.
We did some research to determine the best online payroll services and found some great options for companies to choose from. Our picks depend upon each company’s specific needs.
However, we found that the payroll service that works best for most companies is Gusto.
Gusto is not only great for you as an employer but it is also great for your employees. It is simple for all to use when makes things better for everyone.
With this software, you gain access to all sorts of tools including:
- Full-service payroll
- Medical, dental, vision
- Certified HR experts
- Time tracking
- Hiring and onboarding
- Employee finance tools
- Self-service accounts
- PTO policies
- Great customer support
Here are the plan options available with Gusto.
- Simple: Best for smaller teams, $40/month base price + $6/month/person
- Plus: More team tools, $80/month base price + $12/month/person
- Premium: For larger organizations, contact Gusto
- Contractor: For employers with 1099 contractors. $0/month base price + $6/month/person
Upgraded plans come with more HR features and support, but another important consideration is where your employees live. If you are a multi-state employer of full-time employees, you will want Plus or Premium, which includes multi-state payroll automation. Visit Gusto to see current pricing, add-on features, and learn more.
Tip #3: Gather All Payroll Data
Before you dive into filing Form 944, you need to have all of your information gathered. This means you need to have paperwork regarding:
- Payroll taxes
- Social Security taxes
- Medicare taxes
- Federal income taxes withheld from employee paychecks
In addition to this, you need the total amount of money you have paid any employees throughout the year. Remember, if this amount is more than $4,000, then Form 944 is not the right one for you.
This part of the process becomes much easier to tackle if you have the payroll software we mentioned above. Gusto and other payroll services make access to all the information you need for this more clear and straightforward. Not to mention, it puts it all in one place so you don’t have to hunt around for it in multiple different places.
Tip #4: Take Your Time Filling it Out
Though the form has instructions to guide you through filling it out, make sure you take your time to do it accurately.
The form is divided into five different sections.
The first part of Form 944 asks you to fill out the total wages you paid to your employees for the previous year (box 1) as well as the total federal income tax for the year that you withheld the wages (box 2).
Then you’ll answer whether the wages from box 1 are subject to Social Security or Medicare taxes. If not, check box 3 and skip to box 5. If yes, then make sure to fill out all the parts of 4. This includes your taxable social security wages, taxable social security wages, taxable Medicare wages and tips, and taxable wages and tips subject to Additional Medicare Tax withholding.
Go on to fill out total taxes before adjustments (box 5) and then the current year’s adjustments that may have resulted from sick pay or life insurance (box 6). Combine boxes 5 and 6 to get box 7, which is the total taxes after adjustments.
Box 8 asks whether your business can claim any tax credit for research and box 9 asks you to subtract box 8 from box 7 (if applicable) to get your total taxes after adjustments and credits (box 9).
If you’ve made any deposits, put that amount in box 10 and then enter the difference between box 10 and box 9 into box 11 (if box 9 is greater than box 10). This number is your tax liability and is the amount that you are obligated to pay to the IRS.
However, if box 10 is greater than box 9, then you’ve overpaid your taxes and the amount in box 12 shows the amount of your IRS refund.
Part 2 covers your deposit schedule and tax liability for the year.
If what you entered into line 9 is less than $2,500, then mark that box and move on to Part 3. However, if what you entered into line 9 is more than $2,500, mark that box and fill out boxes 13a – 13l with your tax liability information for each month of the year. By adding the numbers in all boxes 13a – 13l, you should have the same amount you entered into line 9.
This section of the form is only applicable if your business closed or if you stopped paying wages at any point. If this is the case for you, you need to enter the last date that you paid any employees.
If none of this applies to you, then simply leave this part blank.
Next comes the part where you grant permission to the IRS to talk to a third-party designee (i.e. an employee, an accountant, etc.).
If you grant the IRS permission, this designee can answer any questions the IRS may have on your behalf. If you’d rather not grant this permission to the IRS, then check the box that says “no.”
This final part of the form simply asks you to sign your name, which is your way of stating that everything you provided on this form is accurate.
Sign, date, and print your name as well as your title and phone number. If you hired an accountant to fill out this form for you, then your accountant will fill out the part that says “Paid Preparer Use Only.”
Long-Term Strategies for Form 944
As you can see, Form 944 doesn’t have to be complicated if you have things organized. There are some other long-term strategies that you can implement into your business practices to ensure that Form 944 is never headache-inducing.
Here are our strategies that will help to simplify this process for you even more.
File Form 944 and Pay Taxes On Time Every Year
As we mentioned above, you run the risk of some fines and additional issues if you fail to file Form 944 on time.
The exact penalty that you are fined depends on how much you owe in taxes as well as when you finally made the payment. Note that these are two different penalty types and they both might apply to you. There is a 5% penalty for filing the form late and a variable penalty for making your payment late.
For example, if you owe $2,000 to the IRS for the year and you filed your form on time but made your payment 20 days after the deadline, then you don’t have to pay the 5% late filing penalty, but you are responsible for paying an additional 10% of the total taxes owed, which in this case would be $200. The percentage of the total amount you owe in fees depends upon how late your payment is.
Here is an outline of the different penalty percentages:
- 1-5 days late: 2% penalty
- 6-15 days late: 5% penalty
- 16+ days: 10% penalty
- 10 days after receiving IRS notice: 15%
If you did not get a notice from the IRS that you need to fill out form 944, then you have between January 1 and March 15 to request to file it. You can do this in writing or over the phone.
If you made all of your deposits on time and in full, then you have until February 10 of the next year to file Form 944.
The exact deadline of your payroll taxes depends on the amount of your tax liability:
- If your total tax liability is less than $2,500 for the year, you can pay employment taxes for your business when you file Form 944
- If your total tax liability is $2,500 or more for the year but less than $2,500 for the quarter, you can pay employment taxes before the last day of the month after the end of a quarter
- If your fourth quarter tax liability is less than $2,500, you can pay the fourth quarter’s tax liability along with Form 944
- If your total tax liability is over $2,500 for a quarter, you are required to deposit monthly or semi-weekly
Bottom line: it’s really in your best interest to submit both the form and the tax payment at the same time–and on time.
Keep Paperwork Up To Date
If you have inaccurate employee information in your system, then you are in for some trouble when it comes time to fill out Form 944.
To avoid headaches when tax season starts to hit, ensure that all paperwork you have on your employees is up to date. Again, this is where a payroll service will pay off. This type of software makes it easy to make any changes with your employee information and automatically stores things in a way that is easy to access when the time comes.
Hire an Accountant
This guide has shown you that it is certainly possible for you to handle Form 944 on your own. The first time you do it may result in some hiccups, but we doubt you’ll find it ending in disaster.
However, if you don’t have the time to dedicate to make sure the information is in place and everything is accurate, then we suggest hiring an accountant. This is also the way to go if you feel confused by the idea of Form 944.
The right accountant will have ample experience in filling out this form and will work with your business to let you know the specifics of deadlines and other pertinent information.
Though an accountant doesn’t come cheap, it is a business expense that may be worth it for you.
Once you’ve determined whether you’re eligible for Form 944, start preparing by gathering all the information you need about your employees’ wages. The earlier you start on getting things organized, the better. This helps to alleviate any potential headaches and stress that may occur down the line, and also helps to avoid you paying fines.
If you are interested in taking a look at payroll software, be sure to check out our list of the best payroll services.
Time and attendance software will also be important to keep track of your employees’ time worked as well as time off, scheduling, and more. Here are our top picks for time and attendance systems.
If you are working with remote employees, you may find it helpful to check out our picks for the best remote work software. This can help ensure that you and your employees are productive and on-task, even when you’re not in the office together.