Avoid these common payroll tax pitfalls and penalties
No one likes to think about taxes, but they’re an inevitable fact of life as a business owner. According to recent data, 40% of small businesses get penalized for late or inaccurate payroll tax filings.
One reason why…
Many business owners are unaware of the requirements for filing Schedule B with Form 941. This results in missing the due date or getting hit with a hefty penalty by the IRS.
In this guide, we will cover the specifics of Schedule B on Form 941 so that you can understand these tax forms and file them correctly.
Let’s get started!
Here’s what we’ll cover:
- Know the Schedule B requirements
- Know when to file it
- Know how it relates to Form 941
- Know the semiweekly depositor rules
- Know these common mistakes and penalties
Know the Schedule B requirements
Schedule B is a daily tax liability report that accompanies form 941.
This is important because the IRS needs to reconcile deposits throughout the quarter against when the tax liabilities were actually incurred. They need the detailed timeline that Schedule B provides.
But wait, there’s more…
Schedule B isn’t required for all businesses. In fact, many business owners fill one out unnecessarily. The form is actually just a collection of 31 spaces per month, three months per quarter, with each space representing one day of the quarter.
This is how the IRS determines the dates of tax liability, not the dates the deposits were made.
Know when to file it
The rules may sound complicated, but they’re pretty simple once you understand them.
Businesses must file Schedule B if they meet the criteria for semiweekly schedule depositors. Semiweekly depositors are determined by how much total employment taxes were reported in the lookback period.
The lookback period is:
July 1, 2023, through June 30, 2024, for 2025 filers
The “semiweekly threshold” for this lookback period is $50,000.
Another important point is that if a business has $100,000 or more in tax liability on any single day, that business automatically becomes a semiweekly depositor from then on.
This is significant because as a semiweekly depositor, your reporting requirements become more onerous. Filing Schedule B is a necessary step to help the IRS match up your wages against your withholdings.
As a final note, small businesses with a tax liability of less than $2,500 for the quarter aren’t required to file Schedule B.
Know how it relates to form 941
Schedule B works with form 941 to present a complete picture to the IRS.
Form 941 reports total quarterly tax liability on line 12. Schedule B reconciles with that by detailing which days incurred which amounts.
The importance of this can’t be overstated…
The total from Schedule B must match line 12 on Form 941 exactly, or else it will raise IRS flags and lead to penalties.
The form asks for three primary details…
Tax liability for each individual day that you had a payment date. The monthly totals for each of the 3 months. A grand total for the quarter that ties back to Form 941.
All this is to help the IRS know whether or not deposits were made on time. Deposits that are late will accrue penalties.
The penalties are steep:
2% for deposits that are 1-5 days late. 5% for 6-15 days late. 10% for over 15 days. And 15% for more than 10 days after receiving an IRS notice.
With over $8.5 billion in civil penalties assigned by the IRS for employment tax violations in 2023 alone, accuracy is important.
Know the semiweekly depositor rules
Semiweekly depositors have specific rules regarding the timing of tax deposits.
The rules dictate when deposits must be made based on the days of the week the wages were paid.
Here are the specifics:
If you pay wages Wednesday, Thursday, or Friday, then you must deposit the taxes by the following Wednesday. For Saturday, Sunday, Monday, or Tuesday payments, you have until the following Friday to deposit.
But remember the $100,000 rule mentioned above…
If your tax liability reaches $100,000 or more on any given day, then you must deposit that amount by the next business day. This is called the “next-day deposit rule” and it supersedes the normal rules.
Once this rule is triggered, your business becomes a semiweekly depositor for the remainder of the current calendar year and the entire next year.
Know these common mistakes and penalties
Schedule B errors fall into a few common categories.
One is putting down the dates of deposits rather than the dates that wages were paid. Schedule B reports when wages are paid, not when deposits were made. This creates confusion and reporting the wrong daily liabilities.
Another mistake is:
Forgetting to adjust for credits and offsets. Some businesses may be eligible for payroll tax credits that reduce their overall liability.
Businesses that claim the qualified small business payroll tax credit, for example, must adjust the appropriate days’ entries on Schedule B. Omitting that adjustment causes the Schedule B total to exceed Form 941 line 12.
E-filing catches these errors. The IRS recommends it for faster processing and error prevention.
Keep good records throughout the quarter
Good bookkeeping is the key to easy Schedule B filing.
Businesses should keep track of their daily tax liability as part of their normal payroll practices. It’s more difficult and error-prone if you wait until the end of the quarter.
Payroll software can do the legwork of automatically generating the needed Schedule B data. This can save errors and time.
Daily tax liability to track includes:
Income tax withheld from employees’ paychecks. Social Security tax (employee and employer portions). Medicare tax (employee and employer portions). Additional Medicare tax (for high earners).
For 2025, Social Security taxes will be withheld up to a wage base of $176,100 at a rate of 6.2% for the employer and 6.2% for the employee. Medicare tax has no wage cap and will be withheld at 1.45% for both employer and employee.
Employees earning more than a certain amount are subject to an additional 0.9% Medicare tax withheld.
Work with a tax professional
Businesses with complex payroll issues may need professional help.
Businesses with multiple offices, seasonal or temporary employees, or frequent new hires have more complicated Schedule B requirements. Working with a tax professional helps you avoid mistakes that trigger penalties.
Whether or not to outsource tax work is based on the size of your business and its complexity. Smaller businesses often manage Schedule B filing with in-house help and payroll software.
Larger operations can find professional services pay for themselves by avoiding penalties.
The bottom line on schedule B
Schedule B is a detailed record of daily tax liability by semiweekly depositors.
Businesses should understand when it’s required so they can file it correctly without incurring penalties. If your annual employment taxes exceed $50,000 or your business hits the $100,000 single-day threshold, then you are required to file Schedule B.
Form 941 line 12 must match the Schedule B total exactly.
Success hinges on 3 things:
Track tax liability on the day that it is incurred with wages. Understand the difference between semiweekly and monthly depositors. File electronically to take advantage of error checking.
Payroll tax compliance doesn’t have to be complicated or difficult. With the proper records and a focus on filing requirements, you can join the 60% of small businesses who don’t get penalized.
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