Form 944 Rule

by Tom Copeland

January 2006

In 2006, the IRS issued regulations that significantly reduced the paperwork for almost one million business owners, including many family child care providers. This rule allowed providers who owe less than $1,000 in payroll taxes (or about $4,000 in total annual wages) to pay and file these taxes once at the end of the year using  Form 944 (Employer's Annual Federal Tax Return). Eligible providers do not have to pay payroll taxes quarterly using Form 941. Providers still have to pay payroll taxes, but the quarterly filing requirement was eliminated.

Redleaf National Institute's director Tom Copeland proposed this rule to the IRS. "I believe that this rule will benefit many providers by making it easier to file the proper paperwork when hiring temporary employees," said Copeland. "In the past, many providers have not filed the proper payroll tax forms because they dreaded dealing with the complicated and confusing paperwork." Form SS-4 to get an employer's identification number and start filing either Form 941 or  Form 944.

Employee vs. Independent Contractor

Providers who hire anyone to help them care for children should be withholding payroll taxes from these employees. If you have hired helpers in the past but did not withhold payroll taxes, you should file Form SS-4 to get an employer's identification number and start filing either Form 941 or  Form 944.

Many providers believe if they hire someone on a temporary basis and pay them small amounts of money, they are not required to withhold payroll taxes. This is wrong. All helpers are considered employees, not independent contractors. The only exception is if the helper is in the business of providing substitute care or if the person is conducting a special activity (puppet show, swimming lessons, etc.) for the provider's business. For more information, see the (Family Child Care Tax Workbook and Organizer).

Example

After withholding 7.65% in Social Security and Medicare taxes from the helper's pay ($50 x 7.65% = $3.83), the provider would pay her helper $46.17 ($50 - $3.83 = $46.17). Under the old rules, she would be required to send in the $3.83, plus another $3.83 out of her own pocket (for a total of $7.66) to the IRS by filing Form 941. By the end of the year the provider would have filled out Form 941 four times.

Under the new rule, the provider does not have to file Form 941 throughout the year, but instead will file Form 944 at the end of the year. In this example, the provider would send in $22.98 ($7.66 x 3 = $22.98) with Form 944.

Another Option

Providers who owe very little in Social Security and Medicare taxes (such as in this example) do have the option of not withholding these taxes and paying them all out of their own pockets. For example, the above provider could pay the helper $150 for the year and pay the IRS $22.98 out of her pocket. Doing this, results in the provider paying slightly higher income taxes (about 5% of payroll, or an extra $7 in this example). For details on how to handle the taxes on this, see the article When a Provider Pays 100% of Payroll Taxes. Here is an example to illustrate how this new rule will work: A provider hires a helper to substitute for her three times this year (in March, July, and October) and agrees to pay her $50 for each day. This person is an employee and the provider has always been required to withhold payroll taxes. The provider owes 15.3% in Social Security and Medicare taxes on the wages she pays to helpers. Half of this amount (7.65%) is withheld from the employee's paycheck and the other half is paid by the provider out of her pocket. The new rule does not change this requirement.

Summary

Here is an example to illustrate how this new rule will work: A provider hires a helper to substitute for her three times this year (in March, July, and October) and agrees to pay her $50 for each day. This person is an employee and the provider has always been required to withhold payroll taxes. The provider owes 15.3% in Social Security and Medicare taxes on the wages she pays to helpers. Half of this amount (7.65%) is withheld from the employee's paycheck and the other half is paid by the provider out of her pocket. The new rule does not change this requirement. 

After withholding 7.65% in Social Security and Medicare taxes from the helper's pay ($50 x 7.65% = $3.83), the provider would pay her helper $46.17 ($50 - $3.83 = $46.17). Under the old rules, she would be required to send in the $3.83, plus another $3.83 out of her own pocket (for a total of $7.66) to the IRS by filing Form 941. By the end of the year the provider would have filled out Form 941 four times. 

Under the new rule, the provider does not have to file Form 941 throughout the year, but instead will file Form 944 at the end of the year. In this example, the provider would send in $22.98 ($7.66 x 3 = $22.98) with  Form 944. 

Form 944: Employer's Annual Federal Tax Return (PDF)

Press release of IRS ruling (PDF)

Regulations Outlined in IRS Ruling

  • Providers who owe less than $1,000 in payroll taxes (or about $4,000 in total annual wages) can pay and file these taxes once at the end of the year using Form 944 (Employer's Annual Federal Tax Return). As a result of this rule (IRS temporary regulations #148568-04), eligible providers will not have to pay payroll taxes quarterly using Form 941. This went into effect for the 2006 tax season. January 31 is the deadline to file Form 944 for the previous tax year.

  • Providers who have hired temporary employees in past years and paid less than $4,000 in wages should receive a notification letter from the IRS, telling them that they are eligible to file Form 944. If you believe you are eligible for this form and do not receive a letter from the IRS, you can call the IRS at 1-800-829-0115 to find out if you qualify.

  • If you currently do not have employees but hire someone shortly, you will need to obtain an EIN number by filling out Form SS-4. In filling out this form you will be asked how much you estimate you will owe in employment taxes. How you answer this question will determine whether or not you will be eligible to file the new Form 944.

  • Another option: Providers who owe very little in Social Security and Medicare taxes do have the option of not withholding these taxes and paying them all out of their own pocket. For example, a provider could pay her employee $150 for the year and pay the IRS $22.98 out of her pocket (representing the full amount of Social Security and Medicare taxes owed). Doing this results in the provider paying slightly higher income taxes (about 5% of payroll).

This handout was produced by Think Small (www.thinksmall.org).

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