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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
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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.
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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.
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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).
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Tom Copeland - This email address is being protected from spambots. You need JavaScript enabled to view it. Phone: 801-8862322 (ex 321)
Facebook - http://www.facebook.com/tomcopelandblog
Blog - http://www.tomcopelandblog.com
"Become a member of the National Association for Family Child Care, (http://www.nafcc.org) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."
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Form 944 Rule |
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 a 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.
Providers who have hired temporary employees in past years and paid less than $4,000 in wages will begin receiving notification letters from the IRS, telling them that they are eligible to file Form 944. If you believe you are eligible for this new 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, you will need to obtain an EIN number. You can obtain an EIN online from the IRS website at http://www.irs.gov. When you do so 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 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).
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. Phone: 801-886-2322 (ex 321)
Facebook - http://www.facebook.com/tomcopelandblog
Blog - http://www.tomcopelandblog.com
"Become a member of the National Association for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."
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Requirements for Hiring an Employee |
Federal Rules
- Obtain an Employer Identification number (EIN).
- Fill out Form I-9 to verify that the employee is eligible to work in the U.S.
- Have the employee fill out Form W-4 to determine if you must withhold federal income taxes from the employee's pay
- Withhold social security and Medicare taxes quarterly (Form 941). If you pay less than $4,000 in wages in a year, you can instead file an annual Form 944.
- Pay federal unemployment taxes annually (Form 940).
- File annually Forms W-2 and W-3 to report Social Security and Medicare taxes.
- If you hire more than one unrelated person, you will have to pay at least federal minimum wage of $7.25 per hour. If your state minimum wage is higher, you must pay your state minimum wage. State law may require you to pay the state minimum wage even when hiring only one person.
To obtain these federal forms contact the IRS at: www.irs.gov; or 1-800-829-3676.
State Rules
Your state may have rules that require you to:
- Withhold state income taxes
- Pay state unemployment taxes
- Purchase workers’ compensation insurance
Contact your state department of labor further information.
This handout was produced by Think Small (www.thinksmall.org).
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. Phone: 801-886-2322 (ex 321)
Facebook - http://www.facebook.com/tomcopelandblog
Blog - http://www.tomcopelandblog.com
"Become a member of the National Association for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."
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Hiring Family Members |
Many providers hire their own family members and take advantage of IRS rules that allow them to reduce their taxes. If you hire your own children under age 18, your children will not have to pay any Social Security taxes, and if they earn less than $5,700 (2009 rules) they will not owe any federal income taxes. Wages paid to your children to do work for your business are 100% deductible. If you hire your own children who are over age 18 or if you hire your own spouse, wages paid to them are subject to Social Security taxes and federal income taxes. So there is no significant tax benefit to hiring children over age 18 or your spouse unless you set up a medical reimbursement plan that allows you to claim medical expenses as a business deduction.
Providers who do hire their own family members should be careful about keeping the proper records. The IRS is initially suspicious of these arrangements because they assume that providers are trying to claim a business deduction without meeting the requirements of an employer hiring an employee. Providers who are sloppy about their record keeping can get into trouble if they can't show that their child did the work for which they were paid.
Here are the records you should keep if you hire your own children or spouse:
- Get a taxpayer identification number from the IRS (Form SS-4) can be filled out online at http://www.irs.gov).
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Prepare a job description that details what are the responsibilities of the job: play with the children, clean up before and after the children, prepare meals for the children, clean toys, record keeping, etc. Do not include more personal activities such as shopping, mowing the lawn, running family errands, etc.
- Prepare a written agreement between you and your family member that describes the employment arrangement: days and hours of work, pay, etc. Both parties should sign this agreement.
- Keep a daily record of when the work was done. If the work done is the same every day, simply record the days and hours worked: Monday 9am - 10am, Tuesday 9am - 10am, Wednesday 9am - 10am, etc.
- Write out a receipt for each payment, get the family member to sign it, and keep a copy: "Payment of $25 cash for 5 hours of work January 3 - 7, 2010." It is not necessary to pay by check; you can pay with cash. Make this payment out of a separate business account if you have one.
- Payments to family members must be reasonable. If you have a $15,000 business profit, it is unreasonable to pay your own children $6,000 in wages. Payment of $20 per hour to your 15 year old is also unreasonable. The test of what is reasonable is probably how much you would be willing to pay someone who is not a family member.
- If you also give your child an allowance, keep a record of when you gave this allowance and how much it was.
Failure to follow all of these steps can create trouble in an IRS audit. Some providers wait until the end of the year to pay their child or don't keep a daily record of work done. Doing so undermines your position that you have properly hired an employee for your business.
There is some disagreement within the tax preparer community and the IRS about whether it is necessary to file federal payroll tax forms when hiring your child under age 18. Some say that you do not have to fill out these forms because there no federal taxes are due. Others say that it is better to file these forms because it helps support your case that the child is your employee. To be on the safe side, you may want to file these forms. If you are hiring your spouse or your child who is age 18 or older, you must file these forms. If you the total amount you pay to all employees was less than $4,000 you can avoid filing the quarterly Form 941 and instead file an annual Form 944 (contact the IRS at 1-800-829-0115). Federal child labor rules that prevent hiring of children under age 14 do not apply when you hire your own children. Check with your state department of labor to see if you must file any state payroll tax forms and whether any state child labor laws apply.
This handout was produced by Think Small (www.thinksmall.org).
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. Phone: 801-886-2322 (ex 321)
Facebook - http://www.facebook.com/tomcopelandblog
Blog - http://www.tomcopelandblog.com
"Become a member of the National Association for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."
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Tax Forms |
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All Forms are available at http://www.irs.gov |
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Business Use of Your Home |
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Employer's Annual Federal Unemployment (FUTA) Tax Return |
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Employer's Quarterly Federal Tax Return |
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Employer's Annual Federal Tax Return |
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Estimated Tax for Individuals |
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Profit or Loss From Business |
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Self-Employment Tax |
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Amended U.S. Individual Income Tax Return |
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Application for Change In Accounting Method |
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Depreciation and Amortization |
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Casualties and Thefts |
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Application for Automatic Extension of Time to File |
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Disabled Access Credit |
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Expenses for Business Use of Your Home |
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Application for Employer Identification Number |
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Wage and Tax Statement |
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Transmittal of Wage and Tax Statements |
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Employee's Withholding Allowance Certificate |
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Application for IRS Individual Taxplayer Identification Number |
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Dependent Care Provider's Identification and Certification |
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Employment Eligibility Verification* |
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*"Federal Register Vol. 61, No. 195, dated Monday, October 7, 1996, describes the amendment to 8 CFR 274.a2(b). This rule allows employers to electronically generate blank Forms I-9, provided that the resulting form is legible; there is no change to the name, content, or sequence of the data elements and instructions; no additional data elements or language are inserted; and the paper used meets the standards for retention and production for inspection specified under 274a.2(b). When copying or printing the Form I-9, the text of the two sided form may be reproduced in either double-sided or single-sided copies."
This handout was produced by Think Small (www.thinksmall.org).
For Tom’s entire publications visit: NAFCC Store (NAFCC members receive a discount)
Tom Copeland This email address is being protected from spambots. You need JavaScript enabled to view it. Phone: 801-886-2322 (ex 321)
Facebook - http://www.facebook.com/tomcopelandblog
Blog - http://www.tomcopelandblog.com
"Become a member of the National Association for Family Child Care, (http://www.nafcc.org/) and receive monthly business e-newsletters, discounts on books by Tom Copeland, IRS audit help, and much more."
