Form 941 likely to be revised several times in 2010

The IRS is working on revising Form 941, Employer’s Quarterly Federal Tax Return, for the second quarter return due on Aug. 2, 2010. The revisions are necessary because of recent legislation in the “Hiring Incentives to Restore Employment Act” (HIRE Act, P.L. 111-47) that provides a Social Security tax exemption to certain employers that hire unemployed workers between March 19, 2010 and Dec. 31, 2010. Under the legislation, qualified employers will not have to pay their share of the Old Age, Survivors and Disability Insurance tax (OASDI, commonly known as the Social Security tax) on wages paid to a “qualified individual.” The OASDI tax rate is 6.2%. A qualified individual is anyone who:

 (1)     begins work for a qualified employer after Feb. 3, 2010 and before Jan. 1, 2011;

 (1)     certifies by signed affidavit (under penalties of perjury) that he was employed for a total of 40 hours or less during the 60-day period ending on the date the employment begins;

 (1)     is not employed to replace another employee of the employer unless that former employee separated from employment voluntarily, or for cause; and

 (1)     is not related to the employer (under rules similar to those for related individuals in IRC §51(i)).

Businesses, agricultural employers, tax-exempt organizations, and public colleges and universities all qualify to claim this tax benefit. Household employers cannot claim this tax benefit.

This payroll tax relief applies only to wages paid with respect to employment during the period from March 19, 2010 to Dec. 31, 2010. Employers may not claim a Social Security tax exemption on new hires who were first paid wages between Feb. 3, 2010 and March 18, 2010. The Social Security tax exemption will be reported by many employers on Form 941, Employer’s Quarterly Federal Tax Return. The exemption earned for the period from March 19, 2010 to March 31, 2010 may not be claimed on the first quarter Form 941. The tax benefit that employers would have received in the first quarter of 2010 will be claimed on the second quarter Form 941 instead. The IRS has issued a draft version of a revised Form 941 that would be effective beginning with second quarter returns due on Aug. 2, 2010.

The draft version of Form 941 includes the following lines:

·       Line 6a. Number of qualified employees hired or first paid this quarter.

·       Line 6b. Number of qualified new employees who were paid wages this quarter.

·       Line 6c. Exempt wages and tips paid this quarter.

·       Line 6d. Line 6c × .062.

·       Line 12c. Number of qualified individuals paid first quarter wages after March 18 and before April 1.

·       Line 12d. Exempt first quarter wages and tips paid after March 18 and before April 1.

·       Line 12e. Line 12d × .062.

The IRS discussed the draft Form 941 in a payroll industry teleconference call. Shelley Dockstader, IRS Acting National Account Manager, Electronic Tax Administration, pointed out that employers will still compute Social Security taxes on line 5a of Form 941 the same way they did before enactment of the HIRE Act legislation. However, their employment tax liability will be reduced by the amount that they report on line 6d (Social Security tax exemption on new employees hired in second quarter 2010). The amount reported on line 12e (Social Security exemption on new employees hired from March 19, 2010 to March 31, 2010) will be added to other credits that may be applied against an employer’s employment tax liability.

Understanding the HIRE Act. John Tuzynski, Chief of Employment Tax Operations for the IRS’s Small Business/Self-Employed Division, said that eligibility for the exemption is based on the date the new hire was actually paid (i.e., the “check date”). The IRS did not see any reason why an employer could not claim the exemption on a rehired employee who met the above eligibility requirements, as long as the employee wasn’t let go and then rehired in order to claim the exemption.

Employers should reduce their tax deposits to take into account the exemption. Employers who were eligible for the exemption from March 19, 2010 to March 31, 2010 should reduce their first tax deposit in April 2010. The tax liability reported on Form 941, Schedule B, Report of Tax Liability for Semiweekly Schedule Depositors, should be lower because of the exemption claimed on new employees hired in the second quarter of 2010. The second quarter Schedule B should not be adjusted to take into account the exemption claimed on new employees hired from March 19, 2010 to March 31, 2010.

Form W-2 will need to be revised to take into account the legislation.

It’s possible that the draft Form 941 will be revised again. Forms 941-PR, 941-SS, CT-1, and the amended forms in the “X” series will also need to be revised. There will also be a new version of Form 941 for the third quarter of 2010.

New tip examination adjustment line. The draft Form 941 also includes line 5e, Section 3121(q) Notice and Demand tax due on unreported tips. The IRS has started a new compliance program to determine whether employers are paying their share of the FICA tax reported on Form 4137, Social Security and Medicare Tax on Unreported Tip Income. Quarterly filers who owe additional tax may report this tax on line 5e.

Source:  Payroll Updates on Checkpoint Newsstand tab 3/24/2010