Payroll In Practice: 1.13.2025

Question: IRS instructions for Form 941 specify that the adjustment for fractions of cents on Line 7 is for rounding errors on amounts withheld from employees for Social Security, Medicare, and Additional Medicare taxes. Each pay period, for deposit purposes, an employer calculates its share of these taxes as equal to the amount withheld from employees. Is Line 7 also used to adjust rounding errors for the employer share?

Answer: Rounding errors can occur because tax deposit amounts are determined each pay period and are rounded to the nearest cent for withholding and depositing purposes. Deposits are required monthly or semiweekly depending on the employer’s deposit schedule. The employer’s actual tax liability is determined at the end of each quarter for those filing Form 941, Employer’s Quarterly Federal Tax Return, or annually for those filing Form 944, Employer’s Annual Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees.

A rounding error for the employer’s share of Social Security and Medicare taxes is the difference between the deposits made for the employer’s share of taxes during the quarter and the employer’s actual share liability as computed on Form 941, Lines 3 through 12. This adjustment is not part of the fractions-of-cents adjustment entered on Line 7 of Form 941. Any difference between the employer-share deposits and employer-share liability becomes part of the employer’s Form 941 balance due or overpayment once the tax liability computed on Form 941 is compared to the total tax deposits for the quarter.

The entry on Line 7 adjusts the tax liability to include any fractions-of-cents differences in amounts withheld from employee compensation for the employee share of Social Security and Medicare taxes.

Employee withholding is necessarily computed paycheck by paycheck. There may be a rounding adjustment on each paycheck, either up or down, to the nearest cent for the employees’ share of Social Security, Medicare, and, if any, Additional Medicare tax computed on Form 941 Lines 5a through 5d. The amount actually withheld for each separate tax becomes the employee-share deposit liability for that tax. All amounts withheld must be deposited in a timely manner and reported accurately for each employee in the appropriate boxes of Form W-2, Wage and Tax Statement.

For example, an employer has three employees who are paid a weekly salary. During the fourth quarter of 2004, there were 13 weekly pay periods. Each paycheck issued during the quarter had one rounding error for Social Security tax and one for Medicare tax. Two rounding errors per paycheck with three checks per week for 13 weeksequals 78 rounding errors for the quarter. Each error was less than a penny, but the amounts withheld for the quarter for each employee may also vary from the amount withheld from a single quarterly payment of each employee’s quarterly salary, which would involve two errors on each of three payments for a total of six errors.

For Social Security tax, the quarterly errors for employees A, B, and C amounted to a shortfall of five cents for one employee and excess withholdings of six cents and three cents for the other two. For Medicare tax there was a shortfall of five cents for one employee and excess withholding for the other two of three cents each. The net fractions-of-cents adjustment is a positive (excess) five cents (-5+6+3-5+3+3 = 5), which is entered on Line 7 of Form 941 to increase the tax liability for the quarter to match the actual withholding.

If, each pay period, employer share deposits equal employee share deposits for each pay period, the adjustment amount for the employer share will be equal to the employee share adjustment.

Alternatively, the employer could compute its share deposit by multiplying the total wages for the pay period by the tax rates for the employer share, which is 6.2% for Social Security tax and 1.45% for Medicare tax.

This decreases the number of employer share rounding errors for the quarter from 78 to 26. Employers may use either method although they may result in different amounts for the employer-share deposit. Unlike the employee-share deposits which should equal the employee-share tax liability, employer deposits are adjusted to match the actual employer-share tax liability.

At the end of the quarter, the employer may multiply the total wages for the quarter by the employer rates. Under this method, the number of rounding errors for the employer share is only one for each tax. If the employer owes amounts due to the adjustment, it will be reflected on Line 14; if the adjustment results in an overpayment, it will be reflected in Line 15.

The Form 941 computations of the total Social Security and Medicare tax deposit liability begins by multiplying the quarterly wages reported on Lines 5a through 5d of Form 941 by the combined employer and employee tax rates (12.4% Social Security, 2.9% Medicare, and 0.9% Additional Medicare tax). For Lines 5a, Taxable Social Security Wages, and 5b, Taxable Social Security Tips, the combined rate is 12.4%, or 6.2% each for employee and employer. For Line 5c, Taxable Medicare Wages and Tips, the combined rate is 2.9%, or 1.45% each for employer and employee. And for Line 5d, Taxable Wages and Tips Subject to Additional Medicare Tax Withholding, the rate is 0.9% (employee only).

The total reported on Line 5e, Total Social Security and Medicare Taxes, includes the correct employer share but does not account for the differences between the employee share and the actual withholding. Line 7 adjusts the computed employee share of the taxes to equal the total actual withholding so that the Forms 941, tax deposits, and Forms W-2 reconcile with each other.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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