Many small business owners struggle to keep up with the laws and regulations that come with taxes, especially payroll taxes. Navigating tax codes can be a full-time job and a never-ending challenge. As you try to stay up-to-date with ever-changing legislation and payments that need to be made, you still need to run your business. But there’s yet another aspect of tax law that can cause heartburn: the lookback period.
What is a lookback period?
A “lookback period” is the length of time the IRS uses to make sure that your previous tax filings were correct. It determines your deposit timetable for paying FICA (Medicare and Social Security taxes) and federal income tax. The lookback period applies to different types of filings and varies in length. It’s determined by whether your company will file Form 941 or Form 944.
What is the difference between Form 941 and 944?
Most businesses will file Form 941 quarterly. But, some very small employers (those that have an annual Social Security, Medicare, and withheld federal income tax liability of $1,000 or less for the year) will file Form 944 annually.
When do I need to deposit my taxes?
Medicare, Social Security and federal income tax deposits are made on one of two schedules: monthly or semi-weekly. Your company’s total tax liability during the lookback period governs the schedule that your company will adhere to.
- If your tax liability is $50,000 or less during your lookback period, you will make monthly deposits.
- If your tax liability is greater than $50,000 during your lookback period, you will make semi-weekly deposits.
It’s important to note that the lookback period determines your deposit schedule, not a prior deposit schedule or how often your employees are paid.
Form 941 lookback period
Form 941 filers have a lookback period that covers the four quarters from July 1 to June 30 the next year. As an example, to establish your 2019 deposit schedule, add up your tax obligation from July 1, 2017, to June 30, 2018. Your payments would be made on this schedule:
- Quarter 3: July 1 to September 30, 2017
- Quarter 4: October 1 to December 31, 2017
- Quarter 1: January 1 to March 31, 2018
- Quarter 2: April 1 to June 30, 2018
Form 944 lookback period
Form 944 filers, or those companies that filed the form in either one of the past two years, have a lookback period that is two years prior, making the lookback period for 2019 the year 2017. And, remember, if you’re using Form 944, you file annually and not on a quarterly schedule.
To further complicate matters, businesses can choose to use either form, but the switch must be approved in writing by the IRS. Confused yet?
What if I mess up?
Mistakes get made, especially if you’re processing payroll in-house. If you realize you miscalculated your payment (or the IRS does), you’ll correct your error on Form 941-X or Form 944-X. Making a correction doesn’t have an impact on your tax liability for the lookback period; you still have to report the original amount.
How does a new business calculate the lookback period?
Of course, if your company is new, you haven’t yet paid in to federal income tax, Social Security, or Medicare, which would make your tax liability zero for your first lookback period. In this case, you will make monthly deposits for the first year. The following year, you need to make sure that you determine your lookback period based on your first year’s tax liabilities.
Are there penalties for missing a deadline?
You bet there are.
If you use Form 941 and miss the deadline by just one to five days, you can be fined 2%. If you’re six to 15 days late, the fine increases to 5%. Deposits made 16 days late or within 10 days of first notice from the IRS will receive a fine of 10% up to a maximum of 15%.
In addition, you’ll get hit with the Trust Fund Recovery Penalty (TFRP) – 100% of the unpaid tax – for not making your payroll tax deposits on time. Per the IRS, this penalty is, “imposed on the responsible party.” So, if you’re managing your payroll in-house, you will pay the fine. If you use a bookkeeper, they will be fined. If you use a payroll provider, they shoulder the responsibility. In addition to the fines, you’ll also have to pay interest on the tax from the date it was due.
Leave Payroll Taxes to the Experts If reading about all of these rules and regulations (and possible pitfalls) has given you a headache, there’s a simple solution – and it’s not aspirin. Let the pros handle it. When you partner with a company that’s focused on payroll and tax compliance (and has teams of experts that keep an eye on tax legislation every day), you can hand off all of those calculations, preparations and calendar watching and focus on your business.
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