Payroll in Practice: 1.20.21

Practitioners’ questions are answered by a payroll and tax consultant who also is an enrolled agent licensed to practice before the Internal Revenue Service.

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. Our payroll program calculates the employer’s share of these taxes on a per-paycheck basis and the calculated employer’s share is the same as the employee share. Should we also include the rounding error for the employer’s share on Line 7?

Answer: There should not be any rounding error for the employer’s share of the taxes included in the fractions-of-cents adjustment on Line 1 of Form 941, Employer’s Quarterly Federal Tax Return.

The employer share of FICA taxes for a given quarter can be determined without significant rounding error by multiplying the total Social Security wages for the quarter by 6.2% and total taxable Medicare wages for the quarter by 1.45%. Any rounding error for the employer’s share for the quarter would be less than half a cent for each employer tax.

Any rounding difference between the employer share computed by the payroll system on a paycheck or pay period basis during the quarter for tax deposit purposes can be resolved by comparing the total computed by the system with the amount computed on the total wages for the quarter. The difference is the amount by which the deposit for the last pay period of the quarter should be adjusted so that the total deposits for employer taxes for the quarter equal the actual liability attributable to employer taxes for the quarter.

The adjustment for factions of cents is normal for the employee’s share because employee withholding is necessarily computed paycheck by paycheck. The adjustment for fractions of cents should be made only for the employee’s share.

Any amounts withheld from an employee must be deposited on behalf of the employee. The employee should be credited with whatever amount was withheld from the employee on Form W-2, Wage and Tax Statement, and the employer is required to deposit the amount actually withheld.

Example: Three employees, A, B, and C, have weekly salaries of $449.90 for A, $481.21 for B, and $601.90 for C. The salaries did not vary during the fourth quarter of 2020. There were 14 weekly paydays during the fourth quarter—each Friday, plus the payment made Thursday, Dec. 31.

A’s taxes are rounded down each pay by 0.38 cents for Social Security and 0.36 cents for Medicare. For the quarter, the amount withheld is 5 cents less (0.38 x 14 pays = 5.34 cents) for Social Security and Medicare than the amount computed on A’s total quarterly wages.

The taxes for B and C round up for both taxes. B’s by 0.5 cents for Social Security and 0.25 cents for Medicare for each pay period for a quarterly rounding error of 7 cents for Social Security and 3 cents for Medicare. The taxes for C are rounded up by 0.22 cents for Social Security and 0.24 cents for Medicare for each pay period for a quarterly rounding error of 3 cents for Social Security and 3 cents for Medicare.

Assuming the employer’s shares were computed on a paycheck-by-paycheck basis in the same manner as the employee’s shares, the system-computed employer deposits would be $1,330.70 for Social Security and $311.22 for Medicare. Total wages for the three employees for the quarter amounted to $21,462.14. The employer’s share of Social Security tax is $1330.65 ($21,462.14 x 0.062) and of Medicare tax is $311.20 (21,462.14 x 0.0145). The Dec. 31 pay period tax deposit is adjusted downward by the 7-cents total difference so that $1,330.60 of the employer’s Social Security tax and $311.20 of the employer’s Medicare tax has been deposited for the quarter.

Computing the total tax liability for the quarter, total wages for the three employees of $21,462.14 is multiplied by 12.4% to compute combined employer and employee Social Security tax of $2,661.31 and by 2.9% to compute combined employer and employee Medicare tax of $622.40.

Subtracting the employer’s share of Social Security tax of $1,330.65 from the combined total of $2,661.31 leaves the employee’s share of Social Security tax of 1,330.66. Subtracting the employer’s share of Medicare tax of $311.20 from the combined total of $622.40 leaves the employee’s share of $311.20.

However, the actual amounts withheld from employees were $1330.70 Social Security and $311.22 for Medicare. The amount withheld from employees is 4-cents more for Social Security and 2-cents more for Medicare than the computed quarterly amount. That is, a 6-cent fractions of cents increase on Line 7 of Form 941 to the employer’s tax liability for the quarter.

For the individual employees for the quarter, A has a 5-cent shortfall, B has a 7-cent overage, and C has a 3-cent overage for a net 5-cent overage for Social Security. For Medicare, A has a 5-cent shortfall, B has a 3-cent overage, and C has a 3-cent overage for a net 1-cent overage. Net overage on an employee basis matches the 6-cent fractions of cents adjustment. It does not matter that one employee was underpaid while the other employees were overpaid, the employer deposits and reports the amount that was actually withheld from each employee.

In this case, the employer’s total tax liability was increased by 6 cents from the computed amounts on Line 5 of Form 941. The amount could just as easily gone the other way and the employer would have a reduction in total liability by the amount of net underwithholding of employee tax because of fractions of cents.

Question: We are a state government agency and need clarification on Notice 20-54 from the IRS. The notice states that employers are required to report FFCRA sick and emergency family-leave payment information on employee Forms W-2 or on a separate statement. Because the state is not entitled to claim the sick-leave retention credit, is the state covered under FFCRA sick-leave payment reporting?

Answer: Before getting to the actual question, some clarification is required. Retention credits, and related retention payments, are not the same as payments for sick leave and family leave, although the employer tax credits for all of these payments come from the same tax source. Retention credits are to reimburse employers to keep employees on the job instead of laying them off, despite a significant loss of employer income because of the coronavirus pandemic. This was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (Pub. L. 116-136).

The sick- and family-leave payments are paid to employees because they could not work because they or a family member was ill or quarantined because of the coronavirus or had to stay home to care for family members or because children’s schools were closed because of the pandemic. These were part of the Families First Coronavirus Response Act (FFCRA).

Under Labor Department rules, nonfederal public-sector employers generally must provide paid sick- and family-leave wages under the FFCRA (Pub. L. 116-127). However, the federal government, state governments, and agencies of those entities do not qualify as eligible employers, so they are not entitled to receive tax credits for providing paid-leave wages under the FFCRA.

The required reporting with regard to sick- and family-leave payments is the amounts paid to each employee for each type of sick leave and family leave. Because information about these payments is primarily for the benefit of the employees, these amounts are reported in Box 14 of Form W-2 or in a separate schedule.

The main reason the information is required is so employees who are also self-employed in a trade or business, apart from working for an employer, have the information necessary to properly claim the equivalent credits for self-employed individuals. Any payments the worker receives as an employee reduce the amount of credit the worker can claim as a self-employed individual.

Although state governments are not entitled to claim the tax credits, they are subject to the W-2 reporting rules if they are paying qualified sick- and family-leave payments to employees. The reason that the separate schedule is allowed is that the information required to be reported probably would not fit in Box 14.

By Patrick Haggerty

Do you have a question for Payroll in Practice? Send it to phaggerty@prodigy.net.