While hiring employees can be a benefit, it does require you as an employer to make payroll tax payments and report those payments to the IRS as well as your state and local tax authorities.
FICA, which stands for Federal Insurance Contributions Act, is a fund that both employers and employees contribute social security and medicare tax payments to. Form 941 is a tax form that employers must file quarterly to report income tax and FICA taxes withheld from employee paychecks. The employer’s share of social security and medicare taxes is also included on this form.
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What is FICA?
FICA is another name for the social security and medicare systems. It is the only fund that both employee and employers contribute to equally.
The current contribution rate for social security is 12.4%. The employee’s share of 6.2% is withheld from their paycheck, and the employer pays their share of 6.2%. In 2017, taxes are paid on employee wages up to $127,200.
The contribution rate for medicare is 2.9%. The employee’s share of 1.45% is withheld from their paycheck, and the employer pays their share of 1.45%. There’s no income cap on medicare taxes.
As an employer, it is your responsibility to remit both the employee share and your share of FICA taxes on time. We will discuss this more in the “When are social security and medicare taxes due” section of this article. Payroll taxes that are withheld from employee paychecks, along with the employer’s portion of FICA taxes, are reported on Form 941. We will discuss this next.
What is Form 941?
As an employer, you are required to withhold taxes from your employee’s paychecks. Generally, these taxes include income taxes, social security, and medicare taxes. The IRS requires that you report these taxes quarterly on Form 941.
As mentioned above, social security and medicare taxes (FICA taxes) are shared 50/50 by the employer and the employee. The employer share of FICA taxes is reported on Form 941 along with the employee’s share.
If you use a payroll program like Gusto, then filing and paying payroll taxes are a breeze. Gusto manages all aspects of payroll which includes completing payroll forms like form 941 for you!
If you have to complete Form 941 manually, here is some of the info that you will need to have handy:
- General business info (EIN or Tax ID#, Business Name, Mailing Address)
- Total number of employees who received wages, tips, or other compensation (like bonuses or commission) in the quarterly pay period
- Total wages, tips, and other compensation (like bonuses or commission) paid to employees
- Taxable social security and medicare wages
- Total income tax, social security, and medicare tax withheld from employee wages, tips, and other compensation (like bonuses or commission) for the quarter
- Total payments you made for the quarter, including withheld income tax and employee and employer share of social security and medicare taxes
NOTE: If you paid COBRA premiums on behalf of employees who were involuntarily terminated from employment between Sept. 1, 2008 and May 31, 2010, then you may be eligible for the COBRA premium assistance credit. To find out more info on how to claim this credit, refer to IRS Pub 15.
Who Has to Form 941?
In general, you must file Form 941 if you have employees that you paid during the year. You must use Form 941 to report the following:
- Wages you paid to your employees
- Tips your employees reported to you
- Federal income tax you withheld from employees paychecks
- Both employee and employer share of social security and medicare taxes
If you only use independent contractors, then you don’t have to file Form 941. To learn more about the benefits of hiring an independent contractor vs. full time employees, check out our guide.
How Much Social Security and Medicare Tax (FICA Taxes) Do You Have to Pay?
Both employers and employees must contribute to social security and medicare taxes, together called FICA taxes. Employers and employees share this tax obligation equally.
For social security, the employer and employee must each pay 6.2% of an employee’s wages up to a maximum salary of $127,200. What this means is that once an employee has earned $127,200, no additional social security is deducted from their paycheck for the remainder of the year. Since your tax amount must match the employee’s, you would also have no additional social security liability for the remainder of the year.
Unfortunately, there is no wage cap when it comes to medicare taxes. Employees and employers must each pay 1.45% of an employee’s wages. Let’s walk through a couple of examples to show you how this works.
Social Security Example
Let’s assume an employee earns $2000 per pay period. The social security tax calculation would be as follows:
$2000 X 0.062 = $124
In this example, you would deduct $124 from this employee’s gross pay for social security tax each pay period. Since the employer tax must equal the employee social security tax, your share as an employer would also be $124. Thus, the total social security tax payment that you would submit to the IRS for this employee (for this pay period) would be $248 ($124 employee + $124 employer share).
Medicare Example
Using the same employee that earned $2000 per pay period, let’s calculate the medicare tax:
$2000 X 0.0145 = $29
In this example, you would deduct $29 from this employee’s gross pay for medicare tax. Since the employer tax must equal what the employee medicare tax is, your share as an employer would be $29. Thus, the total medicare tax payment that you would submit to the IRS for this employee (for this pay period) would be $58 ($29 employee + $29 employer share).
When Are Social Security and Medicare Taxes (FICA Taxes) Due?
The due date for social security and medicare tax payments is not based on how often you pay employees but instead on how much your total tax liability was for a specified time period. As a result, your due date can change from one year to the next. With that said, before you run your first payroll for the year, you need to determine when you are required to deposit your tax payments at the beginning of the calendar year.
To figure out when your tax payments are due, you must first identify your lookback period.
The lookback period is defined as July 1 of the second preceding calendar year through June 30 of the preceding calendar year. For example, for 2017 the lookback period would be July 1, 2015 through June 30, 2016.
Let’s walk through an example so that you can see how this works.
Lookback Period Example
Let’s say today is January 1, 2017 and you need to determine when you are required to deposit your tax payments. Here are the steps that you need to take to determine when you are required to deposit your tax payments for the year:
Step 1 – Determine your lookback period. For 2017, your lookback period would be July 1, 2015 through June 30, 2016.
Step 2 – You need to have handy your copies of Form 941 that you filed for the lookback period (July 1, 2015 through June 30, 2016). This would include the 941 tax forms filed for the following quarters:
- Qtr 3 2015 (July 1 – Sept 30, 2015)
- Qtr 4 2015 (Oct 1 – Dec 31, 2015)
- Qtr 1 2016 (Jan 1 – Mar 31, 2016)
- Qtr 2 2016 (Apr 1 – Jun 30, 2016)
Step 3 – Add up the tax liability shown on line 10 of each Form 941.
If your total tax liability for all four quarters is $50,000 or less, you must deposit your taxes on a monthly basis. Monthly taxes are due by the 15th day of the following month. On the other hand, if your total tax liability is more than $50,000, you must deposit your tax payments on a semiweekly basis. Semiweekly tax payment due dates are based on what day of the week your payday took place. Refer to the table below for your tax due date.
The exception to this is if your total taxes (on line 10) for the current quarter or the preceding quarter are less than $2,500 then you do not have to make a deposit. Instead, you can send in your payment when you file your Form 941. Let’s look at an example.
Example
Let’s say it is January 2017 and the total tax liability that you owe for the previous quarter came to $2,000. You do not have to make tax deposits for the first quarter of 2017 (Jan-Mar) as long as your taxes do not reach $100,000 within the quarter. If so, then you must follow the $100,000 next-day deposit rule. This rule says that if you accumulate a $100,000 tax liability on any day, you become a semiweekly schedule depositor on the next day and remain so for at least the rest of the calendar year and the following calendar year. For more info, see $100,000 Next-Day Deposit section in IRS Pub 15.
If you are a new employer, then you are automatically considered a monthly depositor since your tax liability for the lookback period would be zero.
Below is a summary table of each type of depositor along with the due dates for tax payments.
Types of Depositors & Due Dates for Tax Payments
| Monthly Depositor | Semiweekly Depositor |
|---|---|
| If you reported $50,000 or less in taxes during the lookback period, you must make monthly payments to the IRS. Payments are due by the 15th day of the following month. | If you reported more than $50,000 of taxes during the lookback period, then you must make semiweekly payments to the IRS. Depending on what your employee payday is, your tax payments will be due as follows:
|
IMPORTANT NOTE: If you are a monthly schedule depositor and you accumulate a $100,000 tax liability on any day, you become a semiweekly schedule depositor on the next day and remain so for at least the rest of the calendar year and the following calendar year. For more info, see $100,000 Next-Day Deposit section in IRS Pub 15.
What is the Penalty if I Don’t Make FICA Payments on Time?
If you don’t deposit your payments on time or you do not deposit payments and you are required to do so or your deposit is for less than the required amount, you may have to pay a penalty. Below is a summary table taken from IRS Pub 15 of the penalties that you may be required to pay based on the number of days your payment is late.
Summary Table of Penalties and Interest for Late Deposits
| Number of Days Late | Penalty |
|---|---|
| Deposits made 1-5 days late | 2% |
| Deposits made 6-15 days late | 5% |
| Deposits made 16 or more days late, but before 10 days from the first date of the first notice sent by the IRS requesting payment. | 10% |
| Amounts that should have been deposited but instead were paid directly to the IRS or paid with your Form 941. | 10% |
| Amounts still unpaid more than 10 days after the date of the first notice sent by the IRS requesting payment or the date you received the notice, demanding payment (whichever is earlier) | 15% |
How Do I Make Social Security & Medicare Payments?
If you are a monthly or semiweekly depositor, then payments must be submitted electronically through the Electronic Filing Tax Payment System (EFTPS). Snail mail is not an option. The payments you submit should include income taxes withheld from all employee paychecks and both your portion and the employee’s portion of social security and medicare taxes.
To use EFTPS, you will need a Federal Employer Identification Number (aka EIN or FEIN). You can apply for an EIN with the IRS here, or sign up for Gusto and they will handle it for you. To learn more about EIN numbers, click here.
If you are not required to make payments during the quarter, you can mail a payment with your Form 941 or submit it through the EFTPS.
When Do You File Form 941 with the IRS & How Do You File?
The due date to file Form 941 is the same for all employers, regardless of whether you are a monthly or semiweekly depositor for FICA taxes. Form 941 is due on the last day of the month that follows the end of the quarter. You will submit Form 941 four times per year. Below you will find a summary table of the due dates for Form 941.
Summary Table of Due Dates for Form 941
| Quarter | Due Date - Form 941 |
|---|---|
| 1st Qtr (Jan 1 - Mar 31) | April 30 |
| 2nd Qtr (Apr 1 - Jun 30) | July 31 |
| 3rd Qtr (Jul 1 - Sep 30) | October 31 |
| 4th Qtr (Oct 1 - Dec 31) | January 31 |
Nowadays, the best way to file tax forms is to use e-file. This service offered by the IRS allows you to file your tax returns electronically for free. Filing your tax return electronically will ensure that it is received on time. If you prefer to go the snail mail route, the state you live in will determine where your tax return is mailed. Refer to the 941 instructions for the address where you can mail your return.
What is the Penalty if I Don’t file Form 941 on Time?
If you don’t file Form 941 on time, you could be subject to the following penalties and interest:
Penalties
- Each month that the form has not been filed, a failure-to-file (FTF) penalty of 5% of the unpaid tax due with that return will be assessed. The maximum penalty is generally 25% of the tax due.
- If you have a balance due that should have been paid with your return (e.g. outstanding FICA payments that you need to make), there is a failure-to-pay (FTP) penalty of 0.5% per month of the amount of tax. This penalty is assessed for each month that the payment is late. The maximum amount of the penalty is also 25% of the tax due.
If both penalties apply in any month, the FTF penalty is reduced by the amount of the FTP penalty. The penalties won’t be charged if you have a reasonable cause for failing to file or pay. If you receive a penalty notice, you can provide a written explanation of why you believe reasonable cause exists.
Interest
In addition to any penalties, interest accrues from the due date of the tax on any unpaid balance. If income, social security, or Medicare taxes that must be withheld aren’t withheld or aren’t paid, you may be personally liable for the trust fund recovery penalty.
Keep in mind that even if you use a third party payer, such as Gusto, that doesn’t relieve you of the responsibility to ensure tax returns are filed and all taxes are paid or deposited correctly and on time. However, most payroll services will reimburse you for any interest and penalties that you may incur if they are indeed at fault for filing and paying your taxes late.
For more info on penalties and interest, check out IRS Pub 15.
State and Local Tax Obligations
Our focus has been on your tax responsibility at the Federal level. This is because social security and medicare taxes are both mandated at the federal level. However, states and localities may have different income tax requirements. To learn more about your tax responsibility at the state level, consult your state tax website.
The Bottom Line
As you can see, there is a lot that goes into calculating and reporting on social security, medicare, and federal income taxes for both you as an employer and your employees. While it might seem manageable to do this by hand if you’ve just got just a few employees, I don’t recommend that you do. Instead, you should let a payroll software like Gusto take care of this for you.
Gusto can handle end to end payroll which not only includes calculating payroll checks but also computing payroll tax liabilities like medicare and social security and completing payroll tax forms like FICA and Form 941. You can even file & pay your taxes electronically from within the software!
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