| Pub. 51, (Circular A), Agricultural Employer's Tax Guide |
2005 Tax Year |
Publication 51 - Main Contents
1. Taxpayer Identification Numbers
If you are required to withhold any federal income, social security, or Medicare taxes, you will need an employer identification
number (EIN) for
yourself and you will need the social security number (SSN) of each employee and the name of each employee as shown on the
employee's social security
card.
Employer identification number (EIN).
The EIN is a nine-digit number that the IRS issues. The digits are arranged as follows: 00-0000000. It is used to
identify the tax accounts of
employers and certain others who have no employees. Use your EIN on all of the items that you send to the IRS and SSA.
If you do not have an EIN, request one on Form SS-4, Application for Employer Identification Number. The Instructions
for Form SS-4 contain
information on how to apply for an EIN online or by mail, fax, or telephone. You may apply for an EIN online by visiting the
IRS website at
www.irs.gov/smallbiz and selecting “ Employer ID Numbers (EINs).”
If you do not have an EIN by the time a return is due, write “ Applied For” and the date you applied for it in the space shown for the number.
If you took over another employer's business, do not use that employer's EIN.
See Depositing without an EIN in section 7 if you must make a tax deposit and you do not have an EIN.
You should have only one EIN. If you have more than one, and are not sure which one to use, call the toll-free Business
and Specialty Tax Line at
1-800-829-4933 (TTY/TDD users can call 1-800-829-4059). Provide the EINs that you have, the name and address to which each
number was assigned, and
the address of your principal place of business. The IRS will tell you which EIN to use.
For more information, see Publication 1635, Understanding Your EIN, or Publication 583, Starting a Business and Keeping
Records.
Social security number.
An employee's social security number (SSN) consists of nine digits arranged as follows: 000-00-0000. You must obtain
each employee's name and SSN
as shown on the employee's social security card because you must enter them on Form W-2. You may, but are not required to,
photocopy the social
security card if the employee provides it. If you do not show the employee's correct name and SSN on Form W-2, you may owe
a penalty unless you have
reasonable cause. See Publication 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs.
Any employee without a social security card can get one by completing Form SS-5, Application for a Social Security
Card, and submitting the
necessary documentation to SSA. You can get Form SS-5 at SSA offices, by calling 1-800-772-1213, or from the SSA website at
www.socialsecurity.gov/online/ss-5.html. The employee
must complete and sign Form SS-5; it cannot be filed by the employer. You may be asked to supply a letter to accompany Form
SS-5 if the employee has
exceeded his or her yearly or lifetime limit for the number of replacement cards allowed.
If you file Form W-2 on paper and your employee has applied for an SSN but does not have one when you must file Form
W-2, enter “ Applied For”
on the form. If you are filing on magnetic diskette or electronically, enter all zeros (000-00-0000) in the social security
number field. When the
employee receives the SSN, file Copy A of Form W-2c, Corrected Wage and Tax Statement, with the SSA to show the employee's
SSN. Furnish Copies B, C,
and 2 of Form W-2c to the employee. Up to five forms W-2c per Form W-3c (up to 50 W-3c reports) may be created and submitted
to the SSA over the
Internet. For more information, visit Social Security's Employer Reporting Instructions and Information webpage at
www.socialsecurity.gov/employer. Advise your employee to correct the SSN on his or her original
Form W-2.
Note: Record the name and number of each employee as they are shown on the employee's social security card. If the employee's name
is not correct as
shown on the card (for example, because of marriage or divorce), the employee should request a corrected card from the SSA.
Continue to report the
employee's wages under the old name until he or she shows you an updated social security card with the new name.
If SSA issues the employee a replacement card after a name change, or a new card with a different social security number after
a change in alien
work status, file a Form W-2c to correct the name/SSN reported on the most recently filed Form W-2. It is not necessary to
correct other years if the
previous name and SSN was used for years before the most recent Form W-2.
IRS individual taxpayer identification numbers (ITINs) for aliens.
Do not accept an ITIN in place of an SSN for employee identification or for work. An ITIN is only available to resident
and nonresident aliens who
are not eligible for U.S. employment and need identification for other tax purposes. You can identify an ITIN because it is
a nine-digit number
beginning with the number “ 9” with either a “ 7” or “ 8” as the fourth digit and is formatted like an SSN (for example, 9NN-7N-NNNN).
An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN.
Verification of social security numbers.
The SSA offers employers and authorized reporting agents four methods for verifying employee SSNs.
-
Internet. Verify up to 10 names and numbers (per screen) online and receive immediate results, or upload batch files of up to
250,000 names and numbers and usually receive results the next government business day by visiting SSA's Employer Instructions
and Information webpage
at
www.socialsecurity.gov/employer and selecting “Social Security Number
Verification.”
-
Telephone. Verify up to five names and numbers by calling 1-800-772-6270 or 1-800-772-1213.
-
Paper. Verify up to 300 names and numbers by submitting a paper request to the Wilkes-Barre Data Operations Center.
-
Magnetic media. Verify between 51 and 250,000 names and numbers by submitting magnetic tape or diskette to SSA.
Some verification methods require registration. For more information, call 1-800-772-6270.
Generally, employees are defined either under common law or under statutes for certain situations.
Employee status under common law.
Generally, a worker who performs services for you is your employee if you have the right to control what will be done
and how it will be done. This
is so even when you give the employee freedom of action. What matters is that you have the right to control the details of
how the services are
performed. Get Publication 15-A, Employer's Supplemental Tax Guide, for more information on how to determine whether an individual
providing services
is an independent contractor or an employee.
You are responsible for withholding and paying employment taxes for your employees. You are also required to file employment
tax returns. These
requirements do not apply to amounts that you pay to independent contractors. The rules discussed in this publication apply
only to workers who are
your employees.
In general, you are an employer of farmworkers if your employees:
-
Raise or harvest agricultural or horticultural products on your farm (including the raising and feeding of livestock);
-
Work in connection with the operation, management, conservation, improvement, or maintenance of your farm and its tools and
equipment, or
services pertaining to hurricane labor;
-
Handle, process, or package any agricultural or horticultural commodity if you produced over half of the commodity (for a
group of up to 20
unincorporated operators, all of the commodity); or
-
Do work for you related to cotton ginning, turpentine, gum resin products, or the operation and maintenance of irrigation
facilities.
For this purpose, the term “farm” includes stock, dairy, poultry, fruit, fur-bearing animal, and truck farms, as well as plantations, ranches,
nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural
commodities, and orchards.
Farmwork does not include reselling activities that do not involve any substantial activity of raising agricultural or horticultural
commodities,
such as a retail store or a greenhouse used primarily for display or storage.
The table on page 21, How Do Employment Taxes Apply to Farmwork, distinguishes between farm and nonfarm activities, and also addresses
rules that apply in special situations.
If you are a crew leader, you are an employer of farmworkers. A crew leader is a person who furnishes and pays (either on
his or her own behalf or
on behalf of the farm operator) workers to do farmwork for the farm operator. If there is no written agreement between you
and the farm operator
stating that you are his or her employee and if you pay the workers (either for yourself or for the farm operator), then you
are a crew leader. For
FUTA tax rules, see section 10.
Cash wages that you pay to employees for farmwork are subject to social security and Medicare taxes. If the wages are subject
to social security
and Medicare taxes, they are also subject to federal income tax withholding. You may also be liable for FUTA tax, which is
not withheld by you or paid
by the employee. FUTA tax is discussed in section 10. Cash wages include checks, money orders, etc. Do not count as cash wages
the value of food,
lodging, and other noncash items.
For more information on what payments are considered taxable wages, see Publication 15 (Circular E).
Commodity wages.
Commodity wages are not cash and are not subject to social security and Medicare taxes or federal income tax withholding.
However, noncash
payments, including commodity wages, are treated as cash wages (see above) if the substance of the transaction is a cash payment.
These noncash
payments are subject to social security and Medicare taxes and federal income tax withholding.
Family members.
Generally, the wages that you pay to family members who are your employees are subject to social security and Medicare
taxes, federal income tax
withholding, and FUTA tax. However, certain exemptions may apply for your child, spouse, or parent. See the table, How Do Employment Taxes Apply
to Farmwork, on
page 21.
Household employees.
The wages of an employee who performs household services, such as a maid, babysitter, gardener, or cook, in your home
are not subject to social
security and Medicare taxes if you pay that employee cash wages of less than $1,500 in 2006.
Social security and Medicare taxes do not apply to cash wages for housework in your private home if it was done by
your spouse or your child under
age 21. Nor do the taxes apply to housework done by your parent unless:
-
You have a child living in your home who is under age 18 or has a physical or mental condition that requires care by an adult
for at least 4
continuous weeks in a calendar quarter, and
-
You are a widow or widower, or divorced and not remarried, or have a spouse in the home who, because of a physical or mental
condition,
cannot care for your child for at least 4 continuous weeks in the quarter.
For more information, see Publication 926, Household Employer's Tax Guide.
Wages for household work may not be a deductible farm expense. See Publication 225, Farmer's Tax Guide.
Share farmers and alien workers.
You do not have to withhold or pay social security and Medicare taxes on amounts paid to share farmers under share-farming
arrangements or on wages
paid to alien workers admitted under section 101(a)(15)(H)(ii)(a) of the Immigration and Nationality Act on a temporary basis
to perform agricultural
labor (that is, “ H-2(A)” visa workers).
4. Social Security and Medicare Taxes
Generally, you must withhold social security and Medicare taxes on all cash wage payments that you make to your employees.
The $150 Test or the $2,500 Test
All cash wages that you pay to an employee during the year for farmwork are subject to social security and Medicare taxes
and federal income tax
withholding if either of the two tests below is met.
-
You pay cash wages to an employee of $150 or more in a year for farmwork (count all cash wages paid on a time, piecework,
or other basis).
The $150 test applies separately to each farmworker that you employ. If you employ a family of workers, each member is treated
separately. Do not
count wages paid by other employers.
-
The total that you pay for farmwork (cash and noncash) to all your employees is $2,500 or more during the year.
Exceptions.
The $150 and $2,500 tests do not apply to wages that you pay to a farmworker who receives less than $150 in annual
cash wages and the wages are not
subject to social security and Medicare taxes, or federal income tax withholding, even if you pay $2,500 or more in that year
to all of your
farmworkers if the farmworker:
-
Is employed in agriculture as a hand-harvest laborer,
-
Is paid piece rates in an operation that is usually paid on a piece-rate basis in the region of employment,
-
Commutes daily from his or her permanent home to the farm, and
-
Had been employed in agriculture less than 13 weeks in the preceding calendar year.
Amounts that you pay to these seasonal farmworkers, however, count toward the $2,500-or-more test to determine whether
wages that you pay to
other farmworkers are subject to social security and Medicare taxes.
Social Security and Medicare Tax Rates
For wages paid in 2006 the social security tax rate is 6.2%, for both the employee and employer, on the first $94,200 paid
to each employee. You
must withhold at this rate from each employee and pay a matching amount.
The Medicare tax rate is 1.45% each for the employer and the employee on all wages. You must withhold at this rate from each
employee and pay a
matching amount.
Employee share paid by employer.
If you would rather pay the employee's share of the social security and Medicare taxes without withholding them from
his or her wages, you may do
so. If you do not withhold the taxes, however, you must still pay them. Any employee social security and Medicare taxes that you pay is
additional income to the employee. Include it in the employee's Form W-2, box 1, but do not count it as social security and
Medicare wages, boxes 3
and 5. Also, do not count the additional income as wages for FUTA tax purposes.
Social security and Medicare taxes apply to most payments of sick pay, including payments made by third parties such
as insurance companies. For
details, see
Publication 15-A.
Withholding social security and Medicare taxes on nonresident alien employees.
In general, if you pay wages to nonresident alien employees, you must withhold social security and Medicare taxes
as you would for a U.S. citizen
or resident alien. However, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions
to this general rule.
Religious exemption.
An exemption from social security and Medicare taxes is available to members of a recognized religious sect opposed
to insurance. This exemption
is available only if both the employee and the employer are members of the sect.
For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious
Workers.
5. Federal Income Tax Withholding
Farmers and crew leaders must withhold federal income tax from the wages of farmworkers if the wages are subject to social
security and Medicare
taxes. The amount to withhold is figured on gross wages before taking out social security and Medicare taxes, union dues,
insurance, etc. You may use
one of several methods to determine the amount of federal income tax withholding. They are discussed in section 13.
Form W-4.
To know how much federal income tax to withhold from employees' wages, you should have a Form W-4, Employee's Withholding
Allowance Certificate, on
file for each employee. Encourage your employees to file an updated Form W-4 for 2006, especially if they owed taxes or received
a large refund when
filing their 2005 tax return. Advise your employees to use the “ IRS Withholding Calculator” on the IRS website at
www.irs.gov/individuals for help in determining how many withholding allowances to claim on their Form W-4.
If your Spanish-speaking employees prefer, they may claim withholding allowances using Forma W-4(SP), Certificado
de Exención de la
Retención del(la) Empleado(a), in place of Form W-4, Employee's Withholding Allowance Certificate. Instructions, in Spanish,
for completing
Form W-4 or Forma W-4(SP) are available in Publication 579SP, Cómo Preparar la Declaración de Impuesto Federal.
Ask each new employee to give you a signed Form W-4 when starting work. Make the form effective with the first wage
payment. If a new employee does
not give you a completed Form W-4, withhold tax as if he or she is single, with no withholding allowances. A Form W-4 remains
in effect until the
employee gives you a new one. For exceptions, see Exemption from federal income tax withholding, IRS review of Forms W-4, and
Invalid Forms W-4 later. If an employee gives you a replacement Form W-4, begin withholding no later than the start of the first payroll
period ending on or after the 30th day from the date when you received the replacement Form W-4.
The amount of federal income tax withholding is based on marital status and withholding allowances. Your employees
may not base their withholding
amounts on a fixed dollar amount or percentage. However, the employee may specify a dollar amount to be withheld in addition
to the amount of
withholding based on filing status and withholding allowances claimed on Form W-4.
Employees may claim fewer withholding allowances than they are entitled to claim. They may do this to ensure that
they have enough withholding or
to offset other sources of taxable income that are not subject to withholding.
Note: A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year.
Publication 505, Tax Withholding and Estimated Tax, contains detailed instructions for completing Form W-4. Along
with Form W-4, you may wish to
order
Publication 505 and Publication 919, How Do I Adjust My Tax Withholding, for your employees.
When you receive a new Form W-4, do not adjust withholding for pay periods before the effective date of the new form;
that is, do not adjust
withholding retroactively. Also, do not accept any withholding or estimated tax payments from your employees in addition to
withholding based on their
Form W-4. If an employee wants additional withholding, he or she should submit a new Form W-4 and, if necessary, pay estimated
tax by filing Form
1040-ES, Estimated Tax for Individuals.
Exemption from federal income tax withholding.
Generally, an employee may claim exemption from federal income tax withholding because he or she had no federal income
tax liability last year and
expects none this year. See the Form W-4 instructions for more information. However, the wages are still subject to social
security and Medicare
taxes.
A Form W-4 claiming exemption from withholding is valid for only one calendar year. To continue to be exempt from
withholding in the next year, an
employee must give you a new Form W-4 by February 15 of that year. If the employee does not give you a new Form W-4, withhold
tax as if the employee
is single with zero withholding allowances or withhold based on the last valid Form W-4 you have for the employee.
New procedure for withholding income taxes on the wages of nonresident alien employees.
In general, you must withhold federal income taxes on the wages of nonresident alien employees. However, see Publication
515 for exceptions to this
general rule.
For wages paid on or after January 1, 2006, you are required to apply a new procedure in calculating the amount of
federal income tax withholding
on the wages of nonresident alien employees. See Notice 2005-76 for details. You can find Notice 2005-76 on page 947 of Internal
Revenue Bulletin
2005-46 at
www.irs.gov/pub/irs-irbs/irb05-46.pdf.
Under this procedure, you add an amount as set forth in the chart below to the nonresident alien employee's wages
solely for purposes of
calculating the federal income tax withholding for each payroll period. You determine the amount to be withheld by applying
the federal income tax
withholding tables to the amount of wages paid plus the additional chart amount. The amount to be added to the nonresident
alien employee's wages to
calculate federal income tax withholding is set forth in the following chart:
Amount to Add to Nonresident Alien Employee's Wages for Calculating Income Tax Withholding Only
| Payroll Period |
Add Additional |
|
|
Weekly
|
$51.00
|
|
|
Biweekly
|
102.00
|
|
|
Semimonthly
|
110.00
|
|
|
Monthly
|
221.00
|
|
|
Quarterly
|
663.00
|
|
|
Semiannually
|
1,325.00
|
|
|
Annually
|
2,650.00
|
|
Daily or Miscellaneous
(each day of the payroll period)
|
10.20
|
|
Note: Nonresident alien students from India and business apprentices from India are not subject to this procedure.
The amounts added under this chart for purposes of this procedure are added to wages solely for the purpose of calculating
the amount of federal
income tax withholding on the wages of the nonresident alien employee. These chart amounts should not be included in any box
on the employee's Form
W-2 and do not increase the federal income tax liability of the employee. Also, these chart amounts do not increase the social
security, Medicare, or
FUTA tax liability of the employer or the employee.
This procedure only applies to nonresident alien employees who have wages subject to federal income tax withholding.
Example.
An employer using the percentage method of withholding pays wages of $500 for a biweekly payroll period to a married nonresident
alien employee.
The nonresident alien has properly completed Form W-4, entering marital status as single with one withholding allowance and
indicating status as a
nonresident alien on line 6 of
Form W-4 (see below). The employer determines the wages to be used in the withholding tables by adding to the $500 amount
of wages paid the amount
of $102 from the chart above ($602 total). The employer then applies the applicable table (Table 2(a), the table for biweekly
payroll period, single
persons) by subtracting the applicable percentage method amount for one withholding allowance for a biweekly payroll period
from $602 and making the
calculations under the table.
The $102 added to wages for purposes of calculating income tax withholding is not reported on Form W-2, and does not affect
the social security
tax, Medicare tax, or FUTA tax liability of the employer or the employee.
Note: This procedure for determining the amount of federal income tax withholding does not apply to a supplemental wage payment
(see Supplemental
wages on page 10) if the 35 percent mandatory flat rate withholding applies or if the 25 percent flat rate withholding is being
used to
calculate income tax withholding on the supplemental wage payment.
Nonresident alien employee's Form W-4.
When completing Forms W-4, nonresident aliens are required to:
-
Not claim an exemption from income tax withholding,
-
Request withholding as if they are single, regardless of their actual marital status,
-
Claim only one allowance (if the nonresident alien is a resident of Canada, Mexico, or Korea, he or she may claim more than
one allowance),
and
-
Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form W-4.
If you maintain an electronic Form W-4 system, you should provide a field for nonresident alien employees to enter
nonresident alien status in lieu
of writing “ Nonresident Alien” or “ NRA” above the dotted line on line 6.
Note: Nonresident alien employees are no longer
required to request additional withholding in the box for line 6 on Form W-4. However, a nonresident alien employee may request
additional withholding at his or her option.
Form 8233.
If a nonresident alien employee claims a tax treaty exemption from withholding, the employee must submit Form 8233,
Exemption from Withholding on
Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with respect to
the income exempt under the
treaty, instead of Form W-4. See Publication 515 for details.
IRS review of Forms W-4.
In the past, you had to routinely send the IRS any Form W-4 claiming complete exemption from withholding if $200 or
more in weekly wages was
expected or claiming more than 10 allowances. Employers no longer have to submit these Forms W-4 to the IRS. However, Forms
W-4 are still subject to
review.
When requested by the IRS, you must make specified original Forms W-4 available for inspection by an IRS employee.
You may also be directed to send
certain
Forms W-4 to the IRS. You may receive a letter from the IRS requiring you to submit a copy of Form W-4 for one or more of
your named employees.
(When we refer to Form W-4, the same rules apply to Forma W-4(SP), its Spanish translation.) Send the requested copy or copies
of Form W-4 to the IRS
at the address provided and in the manner directed by the letter. IRS may also require you to submit copies of Form W-4 to
the IRS as directed by a
revenue procedure or notice published in the Internal Revenue Bulletin.
After submitting a copy of Form W-4 to the IRS, continue to withhold federal income tax based on that Form W-4 if
it is valid (see Invalid
Forms W-4 later). However, if the IRS later notifies you in writing that the employee is not entitled to claim exemption from withholding
or a
claimed number of withholding exemptions, withhold federal income tax based on the effective date and maximum number of withholding
allowances
specified in the notice (commonly referred to as a “ lock-in letter”).
The IRS will also use information reported on
Forms W-2, Wage and Tax Statement, to more effectively identify employees with withholding compliance problems. In some cases,
where a serious
under-withholding problem is found to exist for a particular employee, the IRS may issue a lock-in letter to the employer
specifying the maximum
number of withholding allowances permitted for a specific employee.
After the IRS issues a lock-in letter, if the employee wants to claim complete exemption from withholding or claim
a number of withholding
allowances more than the maximum number specified by the IRS in the lock-in letter, the employee must submit a new Form W-4
and a written statement to
support the claims made by the employee on the Form W-4 to the IRS.
If, after you receive the lock-in letter, your employee provides you with a subsequent Form W-4 that does not claim
exemption from federal income
tax withholding and claims fewer allowances than the number shown in the lock-in letter, resulting in more withholding, withhold based on
the subsequent Form W-4 if it is a valid form. Otherwise, disregard any subsequent Forms W-4 provided by the employee and
withhold based on the
lock-in letter.
For additional information about these new rules, see Treasury Decision 9196. You can find Treasury Decision 9196
on page 1,000 of Internal Revenue
Bulletin 2005-19 at
www.irs.gov/pub/irs-irbs/irb05-19.pdf.
Substitute Forms W-4.
You are encouraged to have your employees use the official version of Form W-4 to claim withholding allowances or
exemption from withholding. Call
the IRS at 1-800-829-3676 or visit the IRS website at
www.irs.gov to obtain copies of Form W-4.
You may use a substitute version of Form W-4 to meet your business needs. However, your substitute Form W-4 must contain
language that is identical
to the official
Form W-4 and your form must meet all current IRS rules for substitute forms. At the time that you provide your substitute
form to the employee, you
must provide him or her with all tables, instructions, and worksheets from the current Form W-4.
You may refuse to accept a substitute form developed by an employee. You may require the employee to use the official
Form W-4 or your substitute
version. See Treasury Decision 9196 for details.
Invalid Forms W-4.
Any unauthorized change or addition to Form W-4 makes it invalid. This includes taking out any language declaring
that the form is true, correct,
and complete. A Form W-4 is also invalid if, by the date an employee gives it to you, he or she indicates in any way that
it is false.
If you receive an invalid Form W-4, do not use it to figure federal income tax withholding. Tell the employee that
it is invalid and ask for
another one. If the employee does not give you a valid one, withhold taxes as if the employee was single and claiming no withholding
allowances.
However, if you have an earlier Form W-4 for this worker that is valid, withhold as you did before.
Amounts exempt from levy on wages, salary, and other income.
If you receive a Notice of Levy on Wages, Salary, and Other Income (Form 668-(W)(c) or 668-W(c)(DO)), you must withhold
amounts as described in the
instructions for these forms. Publication 1494, Table for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income
(Forms 668-W(c),
668-W(c)(DO), and 668-W(ICS)) 2006, shows the exempt amount. If a levy issued in a prior year is still in effect and the taxpayer
submits a new
Statement of Exemptions and Filing Status, use the current year Publication 1494 to compute the exempt amount.
How To Figure Federal Income Tax Withholding
There are several ways to figure federal income tax withholding.
-
Wage bracket tables. See page 19 for directions on how to use the tables.
-
Percentage method. See page 20 for directions on how to use the percentage method.
-
Alternative formula tables for percentage method withholding. See Publication 15-A.
-
Wage bracket percentage method withholding tables. See Publication 15-A.
-
Other alternative methods. See Publication 15-A.
Employers with automated payroll systems will find the two alternative formula tables and the two alternative wage bracket
percentage method tables
in Publication 15-A useful.
If an employee wants additional federal tax withheld, have the employee show the extra amount on Form W-4.
Supplemental wages.
Supplemental wages are compensation paid to an employee in addition to the employee's regular wages. They include,
but are not limited to, bonuses,
commissions, overtime pay, accumulated sick leave, severance pay, awards, prizes, back pay and retroactive pay increases for
current employees, and
payments for nondeductible moving expenses. Other payments subject to the supplemental wage rules include taxable fringe benefits
and expense
allowances paid under a nonaccountable plan.
If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax
as if the total was a single
payment for a regular payroll period.
If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the
federal income tax withholding
method depends partly on whether you withhold federal income tax from your employee's regular wages.
-
If you withhold federal income tax from an employee's regular wages, you can use one of the following methods for the supplemental
wages.
-
Withhold a flat 25% from each payment.
-
Add the supplemental and regular wages for the most recent payroll period this year. Then figure the federal income tax withholding
as if
the total was a single payment. Subtract the tax already withheld from the regular wages. Withhold the remaining tax from
the supplemental
wages.
-
If you did not withhold federal income tax from the employee's regular wages, use method 1b above. (This would occur, for
example, when the
value of the employee's withholding allowances claimed on Form W-4 is more than the wages.)
Separate rules apply to any supplemental wages exceeding $1,000,000 that you pay to an individual during the year. See section
7 in
Publication 15 (Circular E), Employer's Tax Guide for details.
Regardless of the method that you use to withhold federal income tax on supplemental wages, they are generally subject
to social security,
Medicare, and FUTA taxes.
6. Advance Earned Income Credit (EIC) Payment
An employee who expects to be eligible for the earned income credit (EIC) and who expects to have a qualifying child is entitled
to receive EIC
payments with his or her pay during the year. To get these payments, the employee must give you a properly completed Form
W-5 (or Forma W-5(SP), its
Spanish translation), Earned Income Credit Advance Payment Certificate, using either the paper form or the approved electronic
format. You are
required to make advance EIC payments to employees who give you a properly completed Form W-5, except that you are not required
to make these payments
to farmworkers paid on a daily basis.
Certain employees who do not have a qualifying child may be able to claim the EIC on their tax return. However, they cannot
get advance EIC
payments.
For 2006, the advance payment can be as much as $1,648. The tables that begin on page 44 reflect that limit.
Form W-5.
Form W-5 states the eligibility requirements for receiving advance EIC payments. On Form W-5, an employee states that
he or she expects to be
eligible to claim the EIC and shows whether he or she has another Form W-5 in effect with any other current employer.
You must include advance EIC payments with the wages that you pay to eligible employees who give you a signed and
completed Form W-5. Form W-5 is
effective for the first payroll period ending (or the first wage payment made without regard to a payroll period) on or after
the date the employee
gives you the form. It remains in effect until the end of the year or until the employee revokes it or gives you a new one.
Employees must give you a
new Form W-5 each year.
An employee may have only one Form W-5 in effect with a current employer at one time. If an employee is married and
his or her spouse also works,
each spouse should file a separate Form W-5.
For more information, see Form W-5 or Publication 15 (Circular E).
How to figure the advance EIC payment.
Figure the amount of advance EIC to include in the employee's pay by using either the wage bracket or percentage method
tables that begin on page
44. There are separate tables for employees whose spouses have a Form W-5 in effect.
Note: During 2006, if you pay an employee total wages of at least $32,001 ($34,001 if married filing jointly) you must stop making
advance EIC payments
to that employee for the rest of the year.
Paying the advance EIC to employees.
Advance EIC payments are not wages and are not subject to withholding of income, social security, or Medicare taxes.
An advance EIC payment does
not change the amount of income, social security, or Medicare taxes that you withhold from the employee's wages. You add the
advance EIC payment to
the employee's net pay for the pay period. At the end of the year, you show the total advance EIC payments in box 9 on Form
W-2. Do not include this
amount as wages in box 1.
Employer's returns.
Show the total payments that you made to employees on the advance EIC line (line 10) of your Form 943. Subtract this
amount from your total taxes
on line 9. See the Instructions for Form 943. Reduce the amounts reported on line 15 of Form 943 or on
Form 943-A, Agricultural Employer's Record of Federal Tax Liability, by any advance EIC paid to your employees.
Generally, you will make the advance EIC payment from withheld federal income tax and employee and employer social
security and Medicare taxes.
Advance EIC payments are treated as deposits of these taxes on the day that you pay wages (including the advance EIC payment)
to your employees. The
payments are treated as deposits of these taxes in the following order: first to the amount of federal income tax withholding,
then to withheld
employee social security and Medicare taxes, and last, to the employer's share of social security and Medicare taxes. For
more information, see
Publication 15 (Circular E).
Required Notice to Employees
You must notify employees who have no federal income tax withheld that they may be able to claim a tax refund because of the
EIC. Although you do
not have to notify employees who claim exemption from withholding on Form W-4, Employee's Withholding Allowance Certificate,
about the EIC, you are
encouraged to notify any employees whose wages for 2005 were less than $35,263 ($37,263 if married filing jointly) that they
may be eligible to claim
the credit for 2005. This is because eligible employees may get a refund of the amount of EIC that is more than the tax that
they owe.
You will meet the notification requirement if you issue to the employee IRS Form W-2 with the EIC notice on the back of Copy
B, or a substitute
Form W-2 with the same statement. You may also meet the requirement by providing Notice 797, Possible Federal Tax Refund Due
to the Earned Income
Credit (EIC), or your own statement that contains the same wording.
If a substitute Form W-2 is given to the employee on time but does not have the required statement, you must notify the employee
within 1 week of
the date that the substitute Form W-2 is given. If Form W-2 is required but is not given on time, you must give the employee
Notice 797 or your
written statement by the date that Form W-2 is required to be given. If Form W-2 is not required, you must notify the employee
by February 7, 2006.
Generally, you must deposit both the employer and employee shares of social security and Medicare taxes and federal income
tax withheld (minus any
advance earned income credit payments). You must deposit by using the Electronic Federal Tax Payment System (EFTPS) or by
mailing or delivering a
check, money order, or cash with Form 8109, Federal Tax Deposit Coupon, to an authorized financial institution that is an
authorized depositary for
federal taxes. However, some employers must only deposit using EFTPS. See How To Deposit on page 14.
Payment with return.
You may make payments with Forms 943 or 945 instead of depositing if one of the following applies.
-
You report less than a $2,500 tax liability for the year (line 11 of Form 943 or line 4 of Form 945) and you pay in full with
a return that
is filed on time. However, if you are unsure that you will report less than $2,500, deposit under the rules explained in this
section so that you will
not be subject to failure-to-deposit penalties.
-
You are a monthly schedule depositor and make a payment in accordance with the Accuracy of Deposits Rule discussed later. This
payment may be $2,500 or more.
Only monthly schedule depositors, defined later, are allowed to make an Accuracy of Deposits Rule payment with the return.
Semiweekly
schedule depositors must timely deposit the amount. See Accuracy of Deposits Rule and How To Deposit later in this section.
Note: If you employ both farm and nonfarm workers, do not combine the taxes reportable on Form 941 and Form 943 to decide whether
to make a deposit. See
Employers of Both Farm and Nonfarm Workers on page 16.
The rules for determining when to deposit Form 943 taxes are discussed below. (Separate rules apply to federal unemployment
(FUTA) tax. See section
10.) Under these rules, you are classified as either a monthly schedule depositor or a semiweekly schedule depositor.
The terms “monthly schedule depositor” and “semiweekly schedule depositor” do not refer to how often your business pays its employees or
how often you are required to make deposits. The terms identify which set of rules you must follow when you incur a tax liability.
The deposit schedule that you must use for a calendar year is determined from the total taxes (not reduced by any advance
EIC payments) reported on
your Form 943 (line 9) for the lookback period, discussed next.
-
If you reported $50,000 or less of Form 943 taxes for the lookback period, you are a monthly schedule depositor.
-
If you reported more than $50,000 of Form 943 taxes for the lookback period, you are a semiweekly schedule depositor.
Lookback period.
The lookback period is the second calendar year preceding the current calendar year. For example, the lookback period
for 2006 is 2004.
Example of deposit schedule based on lookback period.
Rose Co. reported taxes on Form 943 as follows.
| 2004 — $48,000 |
| 2005 — $60,000 |
Rose Co. is a monthly schedule depositor for 2006 because its taxes for the lookback period ($48,000 for calendar year 2004)
were not more than
$50,000. However, for 2007, Rose Co. is a semiweekly schedule depositor because the total taxes for its lookback period ($60,000
for calendar year
2005) exceeded $50,000.
Adjustments to lookback period taxes.
To determine your taxes for the lookback period, use only the tax that you reported on the original return (Form 943,
line 9). Do not include
adjustments made on a supplemental return filed after the due date of the return. However, if you make adjustments on Form
943, the adjustments are
included in the total tax for the period in which the adjustments are reported.
Example of adjustments.
An employer originally reported total tax of $45,000 for the lookback period in 2004. The employer discovered during March
2005 that the tax during
the lookback period was understated by $10,000 and corrected this error with an adjustment on the 2005 Form 943. The total
tax reported in the
lookback period is still $45,000. The $10,000 adjustment is treated as part of the 2005 taxes.
Deposit period.
The term “ deposit period” refers to the period during which tax liabilities are accumulated for each required deposit due date. For monthly
schedule depositors, the deposit period is a calendar month. The deposit periods for semiweekly schedule depositors are Wednesday
through Friday and
Saturday through Tuesday.
If the total tax reported on line 9 of Form 943 for the lookback period is $50,000 or less, you are a monthly schedule depositor
for the current
year. You must deposit Form 943 taxes on payments made during a calendar month by the 15th day of the following month.
Monthly schedule example.
Red Co. is a seasonal employer and a monthly schedule depositor. It pays wages each Friday. It paid wages during January
2006, but did not pay any
wages during February. Red Co. must deposit the combined tax liabilities for the January paydays by February 15. Red Co. does
not have a deposit
requirement for February (that is, due by March 15) because no wages were paid in February and, therefore, it did not have
a tax liability for
February.
New employers.
For agricultural employers, your tax liability for any year in the lookback period before the date you started or
acquired your business is
considered to be zero. Therefore, you are a monthly schedule depositor for the first and second calendar years of your agricultural
business (but see
the $100,000 Next-Day Deposit Rule on page 13).
Semiweekly Deposit Schedule
You are a semiweekly schedule depositor for a calendar year if the total taxes on line 9 of Form 943 during your lookback
period were more than
$50,000. Under the semiweekly deposit schedule, deposit Form 943 taxes for payments made on Wednesday, Thursday, and/or Friday
by the following
Wednesday. Deposit amounts accumulated for payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday.
Note: Semiweekly schedule depositors must complete Form 943-A and submit it with Form 943.
Semiweekly Deposit Schedule
|
IF the payday falls on a...
|
THEN deposit taxes by
the following...
|
|
Wednesday, Thursday, and/or Friday
|
Wednesday
|
|
Saturday, Sunday, Monday, and/or Tuesday
|
Friday
|
Semiweekly schedule example.
Green, Inc., a semiweekly schedule depositor, pays wages on the last day of each month. Green, Inc. will deposit only
once a month, but the deposit
will be made under the semiweekly deposit schedule as follows. Green, Inc.'s tax liability for the
May 30, 2006 (Tuesday) wage payment must be deposited by June 2, 2006 (Friday).
Semiweekly deposit period spanning two quarters.
If you have more than one pay date during a semiweekly period and the pay dates fall in different calendar quarters,
you will need to make separate
deposits for the separate liabilities. For example, if you have a pay date on Saturday September 30, 2006 (third quarter),
and another pay date on
Tuesday, October 3, 2006 (fourth quarter), two separate deposits will be required even though the pay dates fall within the same semiweekly
period. Both deposits will be due Friday, October 6, 2006 (3 banking days from the end of the semiweekly deposit period).
Deposits on Banking Days Only
If a deposit is required to be made on a day that is not a banking day, the deposit is considered on time if it is made by
the next banking day. In
addition to federal and state bank holidays, Saturdays and Sundays are treated as nonbanking days. For example, if a deposit
is required to be made on
Friday, but Friday is not a banking day, the deposit is considered timely if it is made by the following Monday (if Monday
is a banking day).
Semiweekly schedule depositors
will always have 3 banking days to make a deposit. That is, if any of the 3 weekdays after the end of a semiweekly
period is a banking holiday, you
will have 1 additional banking day to deposit. For example, if a semiweekly schedule depositor accumulated taxes on Friday
and the following Monday is
not a banking day, the deposit normally due on Wednesday may be made on Thursday (allowing 3 banking days to make the deposit).
$100,000 Next-Day Deposit Rule
If you accumulate $100,000 or more of Form 943 taxes (that is, taxes reported on line 11) on any day during a deposit period,
you must deposit the
tax by the close of the next banking day, whether you are a monthly or a semiweekly schedule depositor.
For purposes of the $100,000 rule, do not continue accumulating a tax liability after the end of a deposit period. For example,
if a semiweekly
schedule depositor has accumulated a liability of $95,000 on a Tuesday (of a Saturday-through-Tuesday deposit period) and
accumulated a $10,000
liability on Wednesday, the $100,000 next-day deposit rule does not apply because the $10,000 is accumulated in the next deposit
period. Thus, $95,000
must be deposited on Friday and $10,000 must be deposited on the following Wednesday.
In addition, once you accumulate at least $100,000 in a deposit period, stop accumulating at the end of that day and begin
to accumulate anew on
the next day. For example, Fir Co. is a semiweekly schedule depositor. On Monday, Fir Co. accumulates taxes of $110,000 and
must deposit this amount
on Tuesday, the next banking day. On Tuesday, Fir Co. accumulates additional taxes of $30,000. Because the $30,000 is not
added to the previous
$110,000 and is less than $100,000, Fir Co. does not have to deposit the $30,000 until Friday (following the semiweekly deposit
schedule).
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 the remainder of the calendar year and for the following calendar year.
Example of the $100,000 next-day deposit rule.
Elm, Inc., started business on May 2, 2006. Because Elm, Inc., is a new employer, the taxes for its lookback period
are considered to be zero;
therefore, Elm, Inc., is a monthly schedule depositor. On May 8, Elm, Inc., paid wages for the first time and accumulated
taxes of $50,000. On
May 12 (Friday), Elm, Inc., paid wages and accumulated taxes of $60,000, for a total of $110,000. Because Elm, Inc., accumulated
$110,000 on May
12, it must deposit $110,000 by May 15 (Monday), the next banking day.
Accuracy of Deposits Rule
You are required to deposit 100% of your tax liability on or before the deposit due date. However, penalties will not be applied
for depositing
less than 100% if both of the following conditions are met.
-
Any deposit shortfall does not exceed the greater of $100 or 2% of the amount of taxes otherwise required to be deposited
and
-
The deposit shortfall is paid or deposited by the shortfall makeup date as described below.
Makeup Date for Deposit Shortfall:
-
Monthly Schedule Depositor—Deposit the shortfall or pay it with your return by the due date of your Form 943. You may pay
the shortfall with your Form 943 even if the amount is $2,500 or more.
-
Semiweekly Schedule Depositor—Deposit by the earlier of (a) the first Wednesday or Friday (whichever comes first) that
falls on or after the 15th of the month following the month in which the shortfall occurred or (b) the due date for Form 943.
For example, if a
semiweekly schedule depositor has a deposit shortfall during February 2006, the shortfall makeup date is March 15, 2006 (Wednesday).
The two methods of depositing employment taxes are discussed below. See Payment with return on page 12 for exceptions explaining when
taxes may be paid with the tax return instead of being deposited.
Electronic deposit requirement (EFTPS).
You must make electronic deposits of all depository taxes (such as employment tax, excise tax, and corporate income
tax) using the Electronic
Federal Tax Payment System (EFTPS) in 2006 if:
-
Your total deposits of such taxes in 2004 were more than $200,000 or
-
You were required to use EFTPS in 2005.
If you are required to use EFTPS and use Form 8109 instead, you may be subject to a 10% failure-to-deposit penalty.
EFTPS is a free service
provided by the Department of Treasury. If you are not required to use EFTPS, you may participate voluntarily. To get more
information or to enroll in
EFTPS, call 1-800-555-4477. You can also visit the EFTPS website at
www.EFTPS.gov.
New employers that have a federal tax obligation will be pre-enrolled in EFTPS. Call the toll-free number located in your
Employer Identification
Number (EIN) Package to activate your enrollment and begin making your tax deposit payments.
Depositing on time.
For deposits made by EFTPS to be on time, you must initiate the transaction at least 1 business day before the date
that the deposit is due.
Deposit record.
For your records, an Electronic Funds Transfer (EFT) Trace Number will be provided with each successful payment. The
number can be used as a
receipt or to trace the payment.
Making deposits with FTD coupons.
If you are not making deposits by EFTPS, use Form 8109, Federal Tax Deposit Coupon, to make the deposits at an authorized
financial institution.
For new employers, if you would like to receive a Federal Tax Deposit (FTD) coupon booklet call 1-800-829-4933. Allow
5 to 6 weeks for delivery.
The IRS will keep track of the number of FTD coupons that you use and automatically will send you additional coupons when
you need them. If you do not
receive your resupply of FTD coupons, call 1-800-829-4933. You can have the FTD coupon books sent to a branch office, tax
preparer, or service bureau
that is making your deposits by showing that address on Form 8109-C, FTD Address Change, which is in the FTD coupon book.
(Filing Form 8109-C will not
change your address of record; it will change only the address where the FTD coupons are mailed.) The FTD coupons will be
preprinted with your name,
address, and EIN. They have entry spaces for indicating the type of tax and the tax period for which the deposit is made.
It is very important to clearly mark the correct type of tax and tax period on each FTD coupon. This information is
used by the IRS to credit your
account.
If you have branch offices depositing taxes, give them FTD coupons and complete instructions so that they can deposit
the taxes when due.
Please use only your FTD coupons. If you use anyone else's FTD coupon, you may be subject to a failure-to-deposit
penalty. This is because your
account will be underpaid by the amount of the deposit credited to the other person's account. See Deposit Penalties later for penalty
amounts.
How to deposit with an FTD coupon.
Mail or deliver each FTD coupon and a single payment covering the taxes to be deposited to an authorized depositary.
An authorized depositary is a
financial institution (for example, a commercial bank) that is authorized to accept federal tax deposits. Follow the instructions
in the FTD coupon
book. Make your check or money order payable to the depositary. To help ensure proper crediting of your account, include your
EIN, the type of tax
(for example, Form 943), and the tax period to which the payment applies on your check or money order.
Authorized depositaries must accept cash, a postal money order drawn to the order of the depositary, or a check or
draft drawn on and to the order
of the depositary. You may deposit taxes with a check drawn on another financial institution only if the depositary is willing
to accept that form of
payment. Be sure that the financial institution where you make deposits is an authorized depositary. Deposits made at an unauthorized
institution may
be subject to the failure-to-deposit penalty.
If you prefer, you may mail your coupon and payment to: Financial Agent, Federal Tax Deposit Processing,
P.O. Box 970030, St. Louis, MO 63197. Make your check or money order payable to “ Financial Agent.”
Depositing on time.
The IRS determines if deposits are on time by the date that they are received by an authorized depositary. To be considered
timely, the funds must
be available to the depositary on the deposit due date before the institution's daily cutoff deadline. Contact your local
depositary for information
concerning check clearance and cutoff schedules. However, a deposit received by the authorized depositary after the due date
will be considered timely
if the taxpayer establishes that it was mailed in the United States in a properly addressed, postage prepaid envelope at least
2 days before the due
date.
Note: If you are required to deposit any taxes more than once a month, any deposit of $20,000 or more must be received by the authorized
depositary by
its due date to be timely. See section 7502(e)(3).
Depositing without an EIN.
If you have applied for an EIN but have not received it and you must make a deposit, make the deposit with the IRS.
Do not make the deposit at an
authorized depositary. Make it payable to the “ United States Treasury” and show on it your name (as shown on Form SS-4), address, kind of tax,
period covered, and date you applied for an EIN. Send your deposit with an explanation to your local IRS office or the office
where you file Form 943
or Form 945. The addresses are provided in the separate instructions for Forms 943 and 945 and are also available on the IRS
website at
www.irs.gov. Do not use Form 8109-B, Federal Tax Deposit Coupon, in this situation.
Depositing without Form 8109.
If you do not have a preprinted Form 8109, you may use Form 8109-B to make deposits. Form 8109-B is an over-the-counter
FTD coupon that is not
preprinted with your identifying information. You may get this form by calling 1-800-829-4933. Be sure to have your EIN ready
when you call. You will
not be able to obtain Form 8109-B by calling 1-800-TAX-FORM.
Use Form 8109-B to make deposits only if:
-
You are a new employer and you have been assigned an EIN, but you have not received your initial supply of Forms 8109 or
-
You have not received your resupply of preprinted Forms 8109.
Deposit record.
For your records, a stub is provided with each FTD coupon in the coupon book. The FTD coupon itself will not be returned.
It is used to credit your
account. Your check, bank receipt, or money order is your receipt.
Penalties may apply if you do not make required deposits on time, if you make deposits for less than the required amount,
or if you do not use
EFTPS when required. The penalties do not apply if any failure to make a proper and timely deposit was due to reasonable cause
and not to willful
neglect. For amounts not properly deposited or not deposited on time, the penalty rates are:
Note: Late deposit penalty amounts are determined using calendar days, starting from the due date of the liability.
Order in which deposits are applied.
Deposits generally are applied to the most recent tax liability within the year. If you receive a failure-to-deposit
penalty notice, you may
designate how your payment is to be applied in order to minimize the amount of the penalty. Follow the instructions on the
penalty notice that you
received. For examples on how the IRS will apply deposits and more information on designating deposits, see Rev. Proc. 2001-58.
You can find Rev.
Proc. 2001-58 on page 579 of Internal Revenue Bulletin 2001-50 at
www.irs.gov/pub/irs-irbs/irb01-50.pdf.
Example.
Cedar, Inc., is required to make a deposit of $1,000 on June 15 and $1,500 on July 15. It does not make the deposit on June
15. On July 15, Cedar,
Inc., deposits $2,000. Under the deposits rule, which applies deposits to the most recent tax liability, $1,500 of the deposit
is applied to the July
15 deposit and the remaining $500 is applied to the June deposit. Accordingly, $500 of the June 15 liability remains undeposited.
The penalty on this
underdeposit will apply as explained above.
Trust fund recovery penalty.
If federal income, social security, and Medicare taxes that must be withheld are not withheld or are not deposited
or paid to the United States
Treasury, the trust fund recovery penalty may apply. The penalty is the full amount of the unpaid trust fund tax. This penalty
may apply to you if
these unpaid taxes cannot be immediately collected from the employer or business.
The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for
collecting, accounting for, and
paying over these taxes, and who acted willfully in not doing so.
A responsible person can be an officer or employee of a corporation, a partner or employee of a partnership, an accountant, a volunteer
director/trustee, or an employee of a sole proprietorship. A responsible person also may include one who signs checks for
the business or otherwise
has authority to cause the spending of business funds.
Willfully means voluntarily, consciously, and intentionally. A responsible person acts willfully if the person knows that the required
actions are not taking place.
“Averaged” failure-to-deposit penalty.
IRS may assess an “ averaged” failure-to-deposit (FTD) penalty of 2% to 10% if you are a monthly schedule depositor and did not properly
complete line 15 of Form 943 when your tax liability (line 11) shown on Form 943 was $2,500 or more. IRS may also assess this
penalty of 2% to 10% if
you are a semiweekly schedule depositor and your tax liability (line 11) shown on Form 943 was $2,500 or more and you did
any of the following.
-
Completed line 15 of Form 943 instead of
Form 943-A,
-
Failed to attach a properly completed Form 943-A, or
-
Completed Form 943-A incorrectly, for example, by entering tax deposits instead of tax liabilities in the numbered spaces.
IRS figures the penalty by allocating your total tax liability on line 11 of Form 943 equally throughout the tax period.
Your deposits and payments
may not be counted as timely because IRS does not know the actual dates of your tax liabilities.
You can avoid the penalty by reviewing your return before filing it. Follow these steps before filing your Form 943.
-
If you are a monthly schedule depositor, report your tax liabilities (not your deposits) in the monthly entry spaces on line
15.
-
If you are a semiweekly schedule depositor, report your tax liabilities (not your deposits) on Form 943-A in the lines that
represent the
dates you paid your employees.
-
Verify that your total liability shown on line 15 of Form 943 or on line M of Form 943-A equals your tax liability shown on
line 11 of Form
943.
-
Do not show negative amounts on line 15 or
Form 943-A. If a prior period adjustment results in a decrease in your tax liability, reduce your liability for the day you
discovered the error by
the tax decrease resulting from the error, but not below zero. Apply any remaining decrease to subsequent liabilities.
Note: For the reasons discussed above, IRS may also assess an “averaged” failure-to-deposit penalty on
Forms 941 and 945.
Employers of Both Farm and Nonfarm Workers
If you employ both farm and nonfarm workers, you must treat employment taxes for the farmworkers (Form 943 taxes) separately
from employment taxes
for the nonfarm workers (Form 941 taxes). Form 943 taxes and
Form 941 taxes are not combined for purposes of applying any of the deposit schedule rules.
If a deposit is due, deposit the Form 941 taxes and the Form 943 taxes with separate FTD coupons, or by making separate EFTPS
deposits. For
example, if you are a monthly schedule depositor for both Forms 941 and 943 taxes and your tax liability at the end of June
is $1,500 reportable on
Form 941 and $1,200 reportable on Form 943, deposit both amounts by July 15. Use one FTD coupon to deposit the $1,500 of Form
941 taxes and another
FTD coupon to deposit the $1,200 of Form 943 taxes.
You must file Form 943 for each calendar year beginning with the first year that you pay $2,500 or more for farmwork or you
employ a farmworker who
meets the $150 test explained in section 4. Do not report these wages on
Form 941.
After you file your first return, each year the IRS will send you a Form 943 preaddressed with your name, address, and EIN.
If you do not receive
the preaddressed form, request a blank form from the IRS. If you use a blank form, show your name and EIN exactly as they
appeared on previous
returns.
Household employees.
If you file Form 943 and pay wages to household workers who work on your for-profit farm, you may include the wages
and taxes of these workers on
Form 943. If you choose not to report these wages and taxes on Form 943, or if your household worker does not work on your
for-profit farm, report the
wages of these workers separately on Schedule H (Form 1040), Household Employment Taxes. You must have an EIN to file Schedule
H (Form 1040). See
section 1 for details. If you report the wages on Form 943, include the taxes when you figure deposit requirements or make
deposits. If you include
household employee wages and taxes on Schedule H (Form 1040), do not include the household employee taxes when you figure
deposit requirements or make
Form 943 deposits. See Publication 926, Household Employer's Tax Guide, for more information about household workers.
Penalties.
For each month or part of a month that a return is not filed when required (disregarding any extensions of the filing
deadline), there is a
failure-to-file penalty of 5% of the unpaid tax due with that return. The maximum penalty is 25% of the tax due. Also, for
each month or part of a
month that the tax is paid late (disregarding any extensions of the payment deadline), there is a failure-to-pay penalty of
0.5% per month of the
amount of tax. For individual filers only, the failure-to-pay penalty is reduced from 0.5% per month to 0.25% per month if
an installment agreement is
in effect. You must have filed your return on or before the due date of the return to qualify for the reduced penalty. The
maximum amount of the
failure-to-pay penalty is also 25% of the tax due. If both penalties apply in any month, the failure-to-file penalty is reduced
by the amount of the
failure-to-pay penalty. The penalties will not be charged if you have reasonable cause for failing to file or pay. If you
receive a penalty notice,
you can provide an explanation of why you believe reasonable cause exists. ( Note. 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 are not withheld or are not paid, you may be personally
liable for the trust
fund recovery penalty. See Trust fund recovery penalty in section 7.
Use of a reporting agent or other third-party payroll service provider does not relieve an employer of the responsibility
to ensure that tax
returns are filed and all taxes are paid or deposited correctly and on time.
9. Reporting Adjustments on Form 943
There are two types of adjustments: current year adjustments and prior year adjustments to correct errors. See the Instructions
for Form 943 for
more information on how to report these adjustments.
In certain cases, amounts reported as social security and Medicare taxes on lines 3 and 5 of Form 943 must be adjusted to
arrive at your correct
tax liability. The most common situation involves differences in cents totals due to rounding. Other situations when current
year adjustments may be
necessary include third-party sick pay, group-term life insurance for former employees, and the uncollected employee share
of social security and
Medicare taxes on tips. See Publication 15 (Circular E) for more information on these adjustments.
If you withhold an incorrect amount of federal income tax from an employee, you may adjust the amount withheld in later pay
periods during the
same year to compensate for the error.
Generally, you can correct social security and Medicare errors on prior year Forms 943 by making an adjustment on your Form
943 for the year during
which the error was discovered. The adjustment increases or decreases your tax liability for the year in which it is reported
(the year the error was
discovered) and is interest free. The net adjustments reported on Form 943 may include any number of corrections for one or
more previous years,
including both overpayments and underpayments.
You are required to provide background information and certifications supporting prior year adjustments. File with Form 943 a Form 941c,
Supporting Statement To Correct Information, or attach a statement that shows the following:
-
What the error was,
-
The year in which each error was made and the amount of each error,
-
The date on which you found each error,
-
That you repaid the employee tax or received from each affected employee written consent to this refund or credit if the entry
corrects an
overcollection, and
-
If the entry corrects social security and Medicare taxes overcollected in an earlier year, that you received from the employee
a written
statement that he or she will not claim a refund or credit for the amount.
Do not file Form 941c separately. The IRS will not be able to process your adjustments on Form 943 without this supporting information.
See the instructions for Form 941c for more information.
Federal income tax withholding adjustments.
You cannot adjust the amount reported as federal income tax withheld for a prior year return, even if you withheld
the wrong amount. However, you
may adjust prior year federal income tax withholding to correct an administrative error. An administrative error occurs if the amount you
entered on Form 943 is not the amount that you actually withheld. Examples include mathematical or transposition errors. In
these cases, you should
adjust the return to show the amount actually withheld.
The administrative error adjustment corrects only the amount reported on Form 943 to agree with the actual amount
withheld from wages in that year.
You may also need to correct Forms W-2 for the prior year if they do not show the actual withholding by filing Form
W-2c, Corrected Wage and Tax
Statement, and Form W-3c, Transmittal of Corrected Wage and Tax Statements. Forms W-2c may be created and submitted to SSA
over the Internet. For more
information, visit Social Security's Employer Reporting Instructions and Information webpage at
www.socialsecurity.gov/employer.
Social security and Medicare tax adjustments.
Correct prior year social security and Medicare tax errors by making an adjustment on line 8 of Form 943 for the year
during which the error was
discovered.
If you withheld no tax or less than the correct amount, you may correct the mistake by withholding the tax from a
later payment to the same
employee.
If you withheld employee tax when no tax is due or if you withheld more than the correct amount, you must repay the
employee.
Filing a claim for overreported prior year liabilities.
If you discover an error on a prior year return resulting in a tax overpayment, you may file Form 843, Claim for Refund
and Request for Abatement,
for a refund. This form also can be used to request an abatement of an overassessment of employment taxes, interest, and/or
penalties. You must file
Form 941c, or an equivalent statement, with
Form 843. See the separate Instructions for Form 843.
Note: For purposes of filing Form 843, a Form 943 filed on time is considered to be filed on April 15 of the year after the end
of the tax year.
Generally, a claim may be filed within 3 years after that date.
Collecting underwithheld taxes from employees.
If you withheld no federal income, social security, or Medicare taxes or less than the right amount from an employee's
wages, you can make it up
from future pay to that employee. But you are the one who owes the underpayment. Reimbursement is a matter for settlement
between you and the
employee. Underwithheld federal income tax must be recovered from the employee on or before the last day of the calendar year.
Refunding amounts incorrectly withheld from employees.
If you withheld more than the right amount of federal income, social security, or Medicare taxes from wages paid,
give the employee any excess. The
excess federal income tax withholding must be reimbursed to the employee before the end of the calendar year. Keep in your
records the employee's
written receipt showing the date and amount of the repayment. If you do not have a receipt, you must report and pay each excess
amount when you file
Form 943 for the year in which you withheld too much tax.
Filing corrections to Forms W-2 and W-3.
When adjustments are made to correct social security and Medicare taxes because of a change in the wage totals reported
for a previous year, you
also may need to file Forms W-2c and Form W-3c. Forms W-2c may be created and submitted to SSA over the Internet. For more
information, visit Social
Security's Employer Reporting Instructions and Information webpage at
www.socialsecurity.gov/employer.
10. Federal Unemployment (FUTA) Tax
The Federal Unemployment Tax Act (FUTA), along with state unemployment systems, provides for payments of unemployment compensation
to workers who
have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only the employer pays FUTA tax; it
is not withheld from the
employees' wages. For more information, see the Instructions for Form 940.
For 2005, you must file Form 940 or Form 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return, if you:
-
Paid cash wages of $20,000 or more to farmworkers in any calendar quarter in 2004 or 2005 or
-
Employed 10 or more farmworkers during at least some part of a day (whether or not at the same time) during any 20 or more
different weeks
in 2004 or 20 or more different weeks in 2005.
To determine whether you meet either test above, you must count wages paid to aliens admitted on a temporary basis to the
United States to perform
farmwork, also known as “H-2(A)” visa workers. However, wages paid to “H-2(A)” visa workers are not subject to the FUTA tax.
Generally, farmworkers supplied by a crew
leader are considered employees of the farm operator for purposes of the FUTA tax unless (a) the crew leader
is registered under the Migrant and Seasonal Agricultural Worker Protection Act or (b) substantially all of the workers supplied
by the crew leader
operate or maintain tractors, harvesting or crop-dusting machines, or other machines provided by the crew leader. Therefore,
if (a) or (b) applies,
the farmworkers are generally employees of the crew leader.
You must deposit FUTA tax with an authorized financial institution. (If you are subject to the electronic deposit requirements,
you must use EFTPS.
See section 7.) The deposit rules for FUTA tax are different from those for income, social security, and Medicare taxes. See
Deposit rules for
FUTA tax later.
FUTA tax rate.
For 2005 and 2006, the FUTA tax rate is 6.2% on the first $7,000 of cash wages that you pay to each employee. You
may receive a credit of up to
5.4% of FUTA wages for the state unemployment tax that you pay. If your state tax rate (experience rate) is less than 5.4%,
you are still allowed the
full 5.4% credit. Therefore, your net FUTA tax rate may be as low as 0.8% (.008). FUTA tax applies, however, even if you are
exempt from state
unemployment tax or your employees are ineligible for unemployment compensation benefits. Forms 940 and 940-EZ take state
credits into account.
Note: If you have acquired a business from someone else, you may be able to claim a special credit as a successor employer. See
the Instructions for Form
940.
Deposit rules for FUTA tax.
Generally, deposit FUTA tax quarterly. To figure your FUTA tax, multiply .008 times the amount of wages paid to each
employee during the quarter.
When an employee's wages reach $7,000, do not figure any additional FUTA tax for that employee. If the FUTA tax for the quarter
(plus any undeposited
FUTA tax from prior quarters) is more than $500, deposit the FUTA tax with an authorized financial institution, or by using
EFTPS, explained in
section 7, by the last day of the month following the end of the quarter. If the amount is $500 or less, you do not have to
deposit it, but you must
add it to the amount of tax for the next quarter to determine whether a deposit is required for that quarter. To help ensure
proper crediting to your
account, write your EIN, “ Form 940,” and the tax period the deposit applies to on your check or money order.
If the FUTA tax reported on Form 940 or 940-EZ minus the amounts deposited for the first three quarters is more than
$500, deposit the whole amount
by January 31. If the tax (minus any deposits) is $500 or less, you may either deposit the tax or pay it with the return by
January 31.
Form 940 or Form 940-EZ.
By January 31, file Form 940 or Form 940-EZ. If you make deposits on time in full payment of the tax due for the year,
you have 10 additional days
to file.
Form 940-EZ is a simpler version of Form 940. You can generally use Form 940-EZ for 2005 if:
-
You paid state unemployment taxes (contributions) to only one state,
-
You made the payments to the state by the due date of Form 940 or Form 940-EZ, and
-
All wages subject to FUTA tax were also subject to state unemployment tax, and
-
You did not pay unemployment contributions to a credit reduction state.
If you do not meet these conditions, file Form 940 instead.
Once you have filed a Form 940 or Form 940-EZ, you will receive a preaddressed form near the end of each calendar
year. If you do not receive a
form, request one by calling 1-800-829-4933 in time to receive it and file when due. Alternatively, you may download a copy
of Form 940 or 940-EZ from
the IRS website at
www.irs.gov
11. Records You Should Keep
Every employer subject to employment taxes must keep all related records available for inspection for at least 4 years after
the due date for the
return period to which the records relate, or the date the taxes are paid, whichever is later. You may keep the records in
whatever form you choose.
Keep a record of the following information.
-
Your EIN.
-
Names, addresses, social security numbers, and occupations of employees.
-
Dates of employees' employment.
-
Amounts and dates of all cash wages, annuity, and pension payments.
-
Fair market value and dates of all noncash payments.
-
Periods for which employees were paid while absent due to sickness or injury, and the amount and weekly rate of payments you
or third-party
payers made to them.
-
Dates and amounts of tax deposits that you made and acknowledgment numbers for deposits made by EFTPS.
-
Fringe benefits provided, including substantiation.
Keep copies of the following documents.
-
Forms W-4 (Forma W-4(SP)), W-4P, and W-4S.
-
Forms W-5 (Forma W-5(SP)).
-
Forms W-2, including employee copies of any
Forms W-2 that were returned to you as undeliverable.
-
Returns that you filed.
If a crew
leader furnished you with farmworkers, you must keep a record of the name, permanent mailing address, and EIN
of the crew leader. If the crew leader has no permanent mailing address, record his or her present address.
12. Reconciling Wage Reporting Forms
When there are discrepancies between amounts reported on Form 943 filed with the IRS and Forms W-2 and W-3 filed with the
SSA, the IRS must contact
you to resolve the discrepancies. This costs time and money for the Government and for you.
To help reduce discrepancies:
-
Report bonuses as wages and as social security and Medicare wages on Forms W-2 and 943,
-
Report social security and Medicare wages and taxes separately on Forms W-2, W-3, and 943,
-
Report social security taxes on Form W-2 in the box for social security tax withheld (box 4), not as social security wages,
-
Report Medicare taxes on Form W-2 in the box for Medicare tax withheld (box 6), not as Medicare wages,
-
Make sure that social security wages for each employee do not exceed the annual social security wage base, and
-
Do not report noncash wages that are not subject to social security or Medicare taxes as social security or Medicare wages.
To reduce the discrepancies between amounts reported on Forms W-2, W-3, and 943:
-
Be sure that the amounts on Form W-3 are the total amounts from Forms W-2, excluding any amounts from Forms W-2 that were
marked void,
and
-
Reconcile Form W-3 with your Form 943 by comparing amounts reported for the following items.
-
Federal income tax withholding, social security wages, and Medicare wages.
-
Social security and Medicare taxes. The amounts shown on Form 943, including current year adjustments, should be approximately
twice the
amounts shown on Form W-3.
-
Advance earned income credit (EIC).
Amounts reported on Forms W-2, W-3, and 943 may not match for valid reasons. If they do not match, you should determine that
the reasons are valid.
Keep your reconciliation so that you will have a record of why amounts did not match in case there are inquiries from the
IRS or the SSA.
13. Federal Income Tax Withholding Methods
There are several methods to figure federal income tax withholding for employees. The most common are the wage bracket method
and the percentage
method.
Under the wage bracket method, find the proper table (on pages 24 through 43) for your payroll period and the employee's marital
status as shown on
his or her Form W-4. Then, based on the number of withholding allowances claimed on the Form W-4 and the amount of wages,
find the amount of federal
income tax to withhold. If your employee is claiming more than 10 withholding allowances, see below.
Note: If you cannot use the wage bracket tables because wages exceed the amount shown in the last bracket of the table, use the
percentage method of
withholding described later. Be sure to reduce wages by the amount of total withholding allowances (shown in the table on
page 20) before using the
percentage method tables on pages 22 and 23.
Adjusting wage bracket withholding for employees claiming over 10 withholding allowances.
To adapt the wage bracket tables for employees who are claiming over 10 allowances, follow these steps.
-
Multiply the number of withholding allowances that is over 10 by the allowance value for the payroll period. (The allowance
values are in
the Percentage Method—2006 Amount for One Withholding Allowance table below.)
-
Subtract the result from the employee's wages.
-
On this amount, find and withhold the tax in the column for 10 allowances.
This is a voluntary method. If you use the wage bracket tables, you may continue to withhold the amount in the “ 10” column when your employee
has more than 10 allowances, using the method above. You can also use the other methods described below.
If you do not want to use the wage bracket tables on pages 24 through 43 to figure how much federal income tax to withhold,
you can use the
percentage method based on the table below and the appropriate rate table. This method works for any number of withholding
allowances the employee
claims and any amount of wages.
Use these steps to figure the federal income tax to withhold under the percentage method.
-
Multiply one withholding allowance (see table below) by the number of allowances the employee claims.
-
Subtract that amount from the employee's wages.
-
Determine the amount to withhold from the appropriate table on page 22 or 23.
Percentage Method—2006 Amount for One Withholding Allowance
|
Payroll Period
|
One Withholding Allowance
|
|
Weekly
|
$ 63.46
|
|
Biweekly
|
126.92
|
|
Semimonthly
|
137.50
|
|
Monthly
|
275.00
|
|
Quarterly
|
825.00
|
|
Semiannually
|
1,650.00
|
|
Annually
|
3,300.00
|
|
Daily or Miscellaneous (each day of the payroll period)
|
12.69
|
Example.
An unmarried employee is paid $600 weekly. This employee has a Form W-4 in effect claiming two withholding allowances. Using
the percentage method,
figure the federal income tax withholding as follows:
To figure the federal income tax to withhold, you may reduce the last digit of the wages to zero, or figure the wages to the
nearest dollar.
Annual income tax withholding.
Figure the federal income tax to withhold on annual wages under the Percentage Method for an annual payroll period. Then prorate the tax
back to the payroll period.
Example.
A married person claims four withholding allowances. She is paid $1,000 a week. Multiply the weekly wages by 52 weeks to figure
the annual wage of
$52,000. Subtract $13,200 (the value of four withholding allowances annually) for a balance of $38,800. Using
Table 7—Annual Payroll Period on page 23, the annual federal income tax withholding is $3,875.00. Divide the annual amount by 52.
The weekly federal income tax to withhold is $74.52.
Alternative Methods of Federal Income Tax Withholding
Rather than the Percentage Method or Wage Bracket Method described earlier, you can use an alternative method to withhold
federal income tax. Section 9 of
Publication 15-A, Employer's Supplemental Tax Guide, describes these alternative methods.
Rounding.
If you use the percentage method or alternative methods for federal income tax withholding, you may round the tax
for the pay period to the nearest
dollar. The wage bracket tables are already rounded for you.
If rounding is used, it must be used consistently. Round withheld federal tax amounts to the nearest whole dollar
by (a) dropping amounts under 50
cents and (b) increasing amounts from 50 to 99 cents to the next higher dollar. For example, $2.30 becomes $2, and $2.80 becomes
$3.
14. Advance Earned Income Credit (EIC) Payment Methods
To figure the advance EIC payment, you may use either the Wage Bracket Method or the Percentage Method as explained below.
With either method, the number of withholding allowances that an employee claims on Form W-4 is not used in figuring the advance
EIC payment. Nor does
it matter that the employee has claimed exemption from income tax withholding on Form W-4. See section 6 for an explanation
of the advance EIC.
If you use the wage bracket tables on pages 46 through 51, figure the advance EIC payment as follows.
Find the employee's gross wages before any deductions using the appropriate table. There are different tables for (a) single
or head of household,
(b) married without spouse filing certificate, and (c) married with both spouses filing certificates. Find the amount of the
advance EIC payment shown
in the appropriate table for the amount of wages paid.
If you do not want to use the wage bracket tables to figure how much to include in an employee's wages for the advance EIC
payment, you can use the
percentage computation based on the appropriate rate table.
Find the employee's gross wages before any deductions in the appropriate table on pages 44 or 45. There are different tables
for (a) single or head
of household, (b) married without spouse filing certificate, and (c) married with both spouses filing certificates. Find the
amount of the advance EIC
payment shown in the appropriate table for the amount of wages paid.
Rounding.
The wage bracket tables for advance EIC payments have been rounded to whole dollar amounts.
If you use the percentage method for advance EIC payments, the payments may be rounded to the nearest dollar. The
rules for rounding discussed in
section 13 also apply to advance EIC payments.
15. How Do Employment Taxes Apply to Farmwork?
| |
Income Tax Withholding, Social Security, and Medicare
|
Federal Unemployment Tax
|
|
Farm Employment Includes:
|
|
|
|
1. Cultivating soil; raising or harvesting any agricultural or horticultural commodity; the care of livestock,
poultry, bees, fur-bearing animals, or wildlife.
|
Taxable if $150 test or $2,500 test is met. See section 4.
|
Taxable if either test in section 10 is met.
|
|
2. Work on a farm if major farm duties are in management or maintenance, etc., of farm tools or
equipment or salvaging timber, or clearing brush or other debris, left by hurricane.
|
|
3. Work in connection with the production and harvesting of turpentine and other oleoresinous
products.
|
|
4. Cotton ginning.
|
|
5. Operating or maintenance of ditches, reservoirs, canals, or waterways used only for supplying or
storing water for farming purposes and not owned or operated for profit.
|
|
6. Processing, packaging, etc., any commodity in its unmanufactured state if employed by farm
operator who produced over half of commodity processed or by group of up to 20 unincorporated farm operators if they produced
all the commodity.
|
|
7. Hatching poultry on a farm.*
|
|
8. Production or harvesting of maple syrup.
|
|
Farm Employment Does Not Include:
|
|
|
|
1. Handling or processing commodities after delivery to terminal market for commercial canning or freezing.
|
Taxable under general employment rules. Farm rules do not apply.
|
Taxable under general FUTA rules. Farm rules do not apply.
|
|
2. Operating or maintenance of ditches, canals, reservoirs or waterways not meeting tests in (5) above.
|
|
3. Processing, packaging, delivering, etc., any commodity in its unmanufactured state if group of farm
operators do not meet the tests in (6) above.
|
|
4. Household employment
|
|
|
|
Special Employment Situations:
|
|
|
|
1. Services not in the course of employer's trade or business on farm operated for profit (cash payments
only).
|
Taxable if $150 test or $2,500 test is met (see section 4), unless performed by parent employed by child.
|
Taxable only if $50 or more is paid in a quarter and employee works on 24 or more different days in current or prior
quarter.
|
|
2. Workers admitted under section 101(a)(15)(H)(ii)(a) of the Immigration and Nationality Act on a temporary
basis to perform agricultural labor (“H-2(A)” workers).
|
Exempt.
|
Exempt.
|
|
3. Family employment.
|
Exempt for employer's child under age 18, but counted for $150 test or $2,500 test. Taxable for spouse of employer.
|
Exempt if services performed by employer's parent or spouse or by employer's child under age 21.
|
|
*Hatching poultry off the farm is not considered farmwork for income tax withholding, social security, and
Medicare. It is considered farmwork for federal unemployment tax.
|
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Income Tax Withholding Wage Bracket Tables (Married Persons---Weekly Payroll Period (continued))
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