The Internal Revenue Service has come out of the gate in 2006 with a shiny new employment tax form for small employers.Effective January 1, employers who expect to owe no more than $1,000 in federal employment taxes for the 2006 calendar year will be required to file Form 944, Employer's Annual Federal Tax Return, replacing the quarterly Form 941.
"For some time now, the IRS has been looking for ways to reduce the paperwork burden on individuals and businesses," said Nancy Mathis, a spokeswoman for the IRS.
"We estimate that, at the $1,000-or-less threshold amount, approximately 950,000 taxpayers will be eligible," said Mathis. Overall, the new program is expected to affect the timing of approximately $127 million in tax deposits.
At press time, the IRS was scheduled to contact eligible employers between February 1 and February 15 to advise them of the new form and its filing requirements. The IRS will determine eligibility based on a company's employment tax liability history. Henceforth, a two-year lookback period will apply to employers when determining eligibility. For example, an employer who incurred a payroll tax liability of less than $1,000 in 2005 would be eligible to file Form 944 in 2007.
Employers who are not invited to file Form 944 should contact the IRS and request permission to participate in the program if they think their employment tax liability will not exceed $1,000.
New employers who wish to be considered for participation in the Form 944 Program, as it has been named, must indicate that they estimate their annual federal employment tax liability will not exceed $1,000 when applying for a new federal identification number.
Employers who use Form 944 can wait to pay their employment taxes until January 31 of the year following the tax year. Though technically the 944 is due January 31 and related taxes are due by February 15, employers who deposit all required employment taxes by January 31 have an additional 10 days to file the 944.
Employers who qualify to participate in the Form 944 Program may opt out of the program and continue filing the quarterly 941 forms, but they may only do so if they obtain permission from the IRS. To request permission to file Form 941, an employer who qualifies to participate in the Form 944 Program must contact the IRS in writing indicating that either the employer expects its annual employment tax liability will exceed $1,000, or that it prefers to file Forms 941 quarterly instead of the annual Form 944.
If an employer is a participant in the Form 944 program and determines during the year or in January of the next year when the Form 944 is filed that its federal employment tax liability has exceeded $1,000, the employer should go ahead and file Form 944 as required and should make all necessary tax deposits no later than March 15. There will be no penalty for underpayment if the taxes are paid by the March 15 due date.
Not with the program
Larry Goldman, vice president of Ace Payroll Services in Bethpage, N.Y., doesn't think that his company will be significantly affected by the new program. "It seems like it's just too low of a threshold to have any effect at all," he said of the $1,000 cut-off for annual tax liability. "Most of our clients will be over the liability."
Farley Vener, an Albuquerque, N.M.-based CPA with the firm of Hinkle & Landers, agreed. "It means less paperwork for the clients, the small business owners," he said. Payroll is just one of the services provided by the firm, and Vener sees the Form 944 Program as playing an insignificant part in the overall workload of the firm. "I don't think it will impact our services," said Vener.
Ace Payroll's Goldman also expressed concern over the issue of dealing with clients who qualify initially for the Form 944 Program but then exceed the $1,000 annual limit. "It's just one more thing to worry about," he said.
Laurence Zuckerman, director of educational services at AccountantsWorld, sees the new plan as being beneficial to accountants who perform payroll services for their clients. "It will make it easier for accountants to service their clients," he said. AccountantsWorld provides online payroll processing services for accountants who offer payroll services to their clients.
"There will be some cost to us in terms of developing and implementing and testing," said Zuckerman, describing plans to incorporate the Form 944 into the company's payroll services. He estimates that perhaps 10 percent of the AccountantsWorld payroll client base will be affected by the change.
Bert Doerhoff, owner of a CPA practice in Jefferson City, Mo., thinks the $1,000 threshold is too low. "I see that it's a step in the right direction, but they have just nowhere near gotten close to where they need to be because of the small limit," he said. "Farmers have had access to the 943 [Employer's Annual Federal Tax Return for Agricultural Employees] for years," said Doerhoff. "Why does the small businessman have to do it more often unless he's just at $1,000? It's a real slap in the face."
AccuBiz operates a payroll service, AccuPay, that provides payroll services in 38 states. Because the $1,000 threshold for the Form 944 Program is so low, Doerhoff doesn't think the new program will impact his business. "Their limits are so low it's atrocious," he said. "Great idea, bad limit."
The new 944 program was initiated in response to a proposal made by Tom Copeland, director of the St. Paul, Minn.-based Redleaf National Institute. Redleaf is an organization devoted to helping child care providers manage and improve the quality of their businesses. "I believe that this rule will benefit many providers by making it easier to file the proper paperwork when hiring temporary employees," Copeland said in the company press release.
"This is just a continuation of our efforts to streamline forms and paperwork for taxpayers," said the IRS's Mathis.
The temporary regulations relating to the Form 944 Program can be viewed online at www.irs.gov/pub/irs-regs/ td_9239.pdf. Comments about the proposed regulations will be accepted by the IRS until May 3, 2006. Read more about submitting comments or submit one online at www.irs.gov/regs.
