One Suggestion to Ease Payroll Tax Compliance Burden

Generally, employers are required to file Form 941 on a quarterly basis to report and pay over federal income tax withholdings, social security and Medicare tax. They also must file a Form 940 annually to report federal unemployment taxes.  However, there are some exceptions.


Household employers are allowed to replace the four quarterly Form 941 filings and the annual Form 940 filing with a single annual return, Schedule H, which is filed as part of the payer’s annual individual income tax filing.  The payroll tax liability is not paid separately, but becomes part of the individual income tax liability calculated for Form 1040.  So instead of filing five separate returns and making five separate payments, household employers are allowed to prepare and file only one annual form along with their Form 1040.


Very small employers are allowed to replace the four quarterly Form 941 filings with a single annual Form 944, but this only applies to the smallest of employers – those having an annual liability of under $1000, which translates loosely to social security and Medicare tax on $6500 in wages (even less if federal income taxes were also withheld).  But unlike household employers, these very small employers must still file an annual Form 940 along with the annual Form 944.


When small employers speak of tax compliance burden, payroll tax filings are near the top of the complaint list.  The cost of preparing and filing these quarterly returns adds up.  Also, being required to file four or five returns -- instead of one -- translates into additional opportunities for inadvertent errors, increasing the possibilities of filing penalties.


Why don’t we just consolidate these payroll tax filings?


According to the SBA Office of Advocacy, in 2009, there were 27.5 million businesses in the United States, of which 99.9 percent or 27.4 million had fewer than 500 employees.  If the cost of filing a quarterly payroll tax return is $100, the total annual compliance costs incurred by these 27.4 million small businesses is about $10.9 billion.  If we allowed small businesses to file annually, four returns would be reduced to one, and the annual compliance costs would be reduced by 75 percent to $2.74 billion, a savings to small businesses of over $8 billion.  How could this not make sense?

It is important to note, that whatever the filing scheme (e.g., Form 941, Form 944 or Schedule H), employers are still required to pay in payroll tax liability on a periodic basis, the frequency of which generally depends on the amount of outstanding liability.  So, we are not talking about changing the payment schedule; we are simply speaking to how we can reduce compliance burden on small businesses, which will free them up to do what they do best:  create jobs and grow the economy.


This proposal would save small businesses billions in annual compliance costs, without loss of revenue to the Treasury.  Congress should work to identify simple steps to peel away at unnecessary tax compliance costs for the nation’s job creators.  Eliminating quarterly payroll tax filings for small businesses is a logical step.