Many small businesses shift to annual employment tax return filing

Small businesses are getting a break from filing quarterly employment tax returns. The IRS will permit some small employers to file their employment tax returns annually instead of quarterly. The IRS is sending out letters about the new program to small businesses in February. If you receive a letter from the IRS, give our office a call and we’ll help answers any questions you have. If you don’t receive a letter from the IRS and believe you qualify for the program, we’ll get in touch with the IRS for you.

Who is eligible?

The letter from the IRS will tell you that you are eligible to participate in the “Employers’ Annual Federal Tax Program (Form 944).” This program is also known as the “Form 944 Program.” Form 944 is the new form you will use instead of Form 941, which you are currently filing.

The Form 944 Program is only open to “small employers.” For this program, the IRS is defining “small employers” as employers whose estimated annual employment tax liability is $1,000 or less. Since employment tax liability includes income tax withholding and FICA taxes, the IRS estimates that having a quarterly payroll of $4,000 or less generally will qualify a business for annual filing.

If you receive a letter from the IRS, you must participate in the Form 944 Program and file your employment returns annually unless you tell the IRS otherwise. You will use new Form 944 instead of Form 941.

Once in the program, you must file Form 944 even if your actual employment taxes for the year will exceed $1,000. When your employment taxes exceed $1,000, the IRS will notify you that you are no longer eligible for the program and you will have to file Form 941.

Opt-out feature

The IRS is allowing some small employers to opt-out of annual filing. You can opt-out of the program if you prefer to electronically file quarterly Form 941 or if you anticipate your employment tax liability will exceed $1,000. Before you decide to opt-out, let’s sit down and review the benefits of the new program in more detail.

New businesses

New businesses that expect to owe $1,000 or less in total annual employment taxes are eligible.

If you are starting a new business, you won’t receive a letter from the IRS about the Form 944 Program. You will have to tell the IRS that you want to participate. Our office will alert the IRS when we apply for your Employer’s Identification Number (EIN). The IRS will either accept you into the Form 944 Program when it issues your EIN or tell you that you are ineligible.

Special circumstances

You may be unsure if your employment tax liability will exceed $1,000. The IRS has made some contingency plans so you won’t be penalized.

You can avoid the penalty for failing to make a timely monthly deposit for your January taxes if the entire January balance is paid in full by March 15 of that year. Normally, the taxes would be due on February 15, just two weeks after the January 31 deadline, but the IRS is extending the deadline to March 14.

Example. You decide to participate in the Form 944 Program throughout 2007. In January 2008, you file your annual employment tax return and realize that your employment tax liability was higher than the $1,000 threshold. It was $5,500. Because you exceeded the $1,000 threshold for 2007, you are not eligible for the Form 944 Program in 2008. You must therefore make monthly deposits in 2008, including one for the month of January. Usually, you would have to pay January 2008 employment taxes by February 15, 2008 but the IRS is making a special exception. You will have until March 15, 2008 to catch up.

More changes possible

The Form 944 Program is likely just the beginning of more simplification for small businesses. The IRS is also considering allowing more employers to become quarterly filers. Toward that end, the IRS has proposed raising the threshold level for paying quarterly from $1,000 to $2,500. We will keep you posted on developments so that your business may make maximum use of the changes taking place for federal employment tax reporting and payment.

IRS CIRCULAR 230 REQUIRED NOTICE
IRS Regulations require that we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended to be used and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or for the purpose of promoting, marketing or recommending to another party any transaction or tax-related matter.