One of the most time-consuming tasks for a small-business owner is the calculation of federal payroll taxes. Even after withholding the correct amount from employees' paychecks, employers must pay additional payroll taxes on behalf of their employees. Although this can be a tedious and sometimes tricky task -- because even small, unintentional miscalculations could get you in trouble with the tax authorities -- it pays to do it right.
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Collect all payroll records you used to calculate employee payroll taxes and download Form 941 from the IRS website.
Fill in all employer information on Form 941, including your employer identification number. This section is located above Part 1.
Report all employee wages and tips from Part 1. If you have been regularly withholding employee payroll tax from your employees' paychecks, this information should be available to you. Remember to calculate and report these amounts with respect to the entire quarter instead of the employee pay period.
Calculate all wages and tips that are subject to the FICA and Medicare tax. Certain maximum yearly income rates apply (these maximums vary from year to year). You do not have to pay FICA or Medicare on any portion of an employee's salary that exceeds these maximums.
Multiply wages and tips subject to each of the FICA and Medicare tax by their respective tax rates (these rates are supplied in Form 941). This will give you total Social Security and Medicare taxes.
Calculate the total federal taxes you have withheld form your employees' paychecks and subtract from the amount calculated in Step 5. This will give you your total taxes before adjustments.
Calculate applicable adjustments, including items such as sick pay and group term life insurance, to arrive at your total adjusted tax.
Subtract any advance earned income credits you have paid to employees from the amount in Step 7.
Subtract any deposits you have made for the quarter and any credits from previous overpayment from the amount in Step 8.
Subtract any COBRA assistance payments you have made from the amount in Step 9.
If the result from Step 10 is positive, the amount remaining is the amount of employer payroll tax you owe. If the result from Step 10 is negative, you owe nothing and are entitled to a credit against future amounts due.
Tips and warnings
- This article deals with federal taxes only. Don't forget to calculate state and local taxes applicable to your particular location. In most jurisdictions, the calculation method is comparable with that of federal payroll taxes.
- If your business is new, remember that employer payroll taxes must be calculated quarterly, not yearly, as is the case with individual income tax returns.
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