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Payroll Taxes

Employer Payroll Tax Liability, Tax Deposits, and Fraction of Cents for Form 941

September 10th, 2019

When preparing a Federal Form 941 to report employer’s quarterly payroll and taxes, you may notice line 7 described as “Current quarter’s adjustment for fractions of cents.”

You may wonder what “fraction of cents” is adjusting, how it is calculated, and when it should be used.

The reason for the adjustment is simply the result of “rounding differences,” or rounding errors, due to necessary rounding of a calculated number to two decimal points only for cents.

Line 2 of the Form 941 reports the “total wage” for the quarter, and line 5 (a-d) of the Form 941 calculates the employee payroll social security and medicare taxes using the total payroll taxable wage for the quarter.  Based on the “total wage” for the quarter, the “total tax liability” is calculated for the whole quarter as one total amount.

When the employer calculates paychecks for employees and for each payday, the employee payroll social security and medicare taxes are calculated for each individual employee check.  The “total tax liability” is then calculated by adding the taxes from all employee paychecks for the quarter.  The amounts are reported on line 16 of the Form 941 based on the employee payroll “deposit schedule.”  If the total payroll tax liability is less than $2,500, the total payroll tax liability amount is reported as one number.  If your business payroll tax deposit schedule is “monthly,” you need to deposit payroll taxes every month, the total tax liability is reported for each of the 3 months in the quarter.  If your company is a “semi-weekly” depositor, you need to prepare a Schedule B that lists the taxes for each payday.  Because line 16 reports an amount that is summed up from individual checks, the total could be different from the total reported on line 6 of the Form 941.

Since the difference is a result of “rounding differences,” purely mathematical, it could be positive or negative, but it is always a small amount, likely a few cents.  The adjustment is therefore called “fraction of cents.”

It is important to understand that the amounts reported in line 16 of Form 941, or Schedule B, are the true tax liabilities for the employer for the quarter.  Line 7 of Form 941, fraction of cents, is used to “adjust” line 6 calculated from the “total wage” for the quarter.

Another important concept is to make sure line 16 reports the “tax liabilities,” not the “actual taxes deposited.”  Users generally enter the amounts deposited to the IRS into line 16 or Schedule B.  That is fine when the tax liabilities are the same as the taxes deposited to the IRS.   However, when there is an error or adjustment to any paycheck for any reason, the company may over or under pay taxes and the correct tax liabilities need to be re-calculated and reported in line 16.

In summary:

  • The tax liabilities reported in line 16 are the true and correct “tax liabilities” for the employer for the quarter.
  • Fraction of cents is used to adjust the “total tax liability” of line 6 to match the “tax liabilities” reported in line 16 based on deposit schedule.
  • Line 16 reports the true and correct “tax liability.” Do not enter the amounts of “tax deposit” that were paid to the IRS.

About C&S Technologies

C&S Technologies, Inc. has been providing small businesses throughout the nation with business payroll and tax services since 1996. The Silicon Valley based company offers six business payroll management solutions that allow business owners and managers to choose which specialty services suit their individual needs, including eSmartPaycheck.comPaycheckManager.comSimplePayroll.com, w2manager.com, 1099manager.com, and eSmartPayroll.com.

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