What's New

Additional federal holiday. January 20, 2005, is Inauguration Day and has been designated as a federal holiday for tax purposes. Tax returns due on that day may be filed on the next business day. Also, January 20, 2005, is not a banking day under federal tax deposit rules.

Redesigned Form 941. Form 941, Employer's Quarterly Federal Tax Return, was completely redesigned for tax periods beginning after December 31, 2004. Many of the reporting lines on the redesigned Form 941 have changed from those shown on the January 2004 revision. Form 941 line references in this publication relate to the January 2005 revision of Form 941. Use only the redesigned version of Form 941 (revision date of January 2005 or later) to report employment taxes for tax periods beginning after December 31, 2004. Use the January 2004 revision of this publication for Form 941 line references relating to tax periods ending before 2005, including the fourth quarter 2004 Form 941 that is due January 31, 2005.

Increase to FUTA tax deposit threshold. The Treasury Department recently amended Regulations section 31.6302(c)-3 to increase the accumulated FUTA tax deposit threshold from $100 to $500. The $500 threshold applies to FUTA tax deposits required for taxes reported on Forms 940, 940-EZ, and 940-PR, Employer's Annual Federal Unemployment (FUTA) Tax Return for tax periods beginning after December 31, 2004. For more information about this and other important tax changes, see Publication 553, Highlights of 2004 Tax Changes.

Changes to nonqualified deferred compensation plans. New section 409A added by the American Jobs Creation Act of 2004 provides that all amounts deferred under a nonqualified deferred compensation (NQDC) plan for all taxable years are currently includible in gross income unless certain requirements are satisfied. If section 409A requires an amount to be included in gross income, the statute imposes a substantial additional tax. Section 409A generally is effective with respect to amounts deferred in taxable years beginning after December 31, 2004, but deferrals made prior to that year may be subject to the statute under certain circumstances. The Act also provides significant withholding and reporting requirements for the NQDC. See section 5 of Publication 15-A, Employer's Supplemental Tax Guide, for more information.

New form for reporting discrepancies between Forms 941 and Forms W-2. We recently developed Schedule D (Form 941), Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations. You may use Schedule D (Form 941) to explain certain wage, tax, and payment discrepancies between Forms 941 and Forms W-2 that were caused by acquisitions, statutory mergers, or consolidations.

Social security and Medicare tax for 2005. Do not withhold social security tax after an employee reaches $90,000 in social security wages. (There is no limit on the amount of wages subject to Medicare tax.)

Increase to withholding on supplemental wage payments exceeding $1,000,000. Section 904 of the American jobs Creation Act of 2004 increased the flat withholding rate on supplemental wage payments that exceed $1,000,000 during the year to 35%. See section 7 for more information.

Employment contract signing and cancellation payments. Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and federal unemployment taxes and income tax withholding. The IRS will not apply this rule to certain signing bonuses or similar amounts paid in connection with an employee's initial employment with the employer pursuant to a contract entered into before January 12, 2005, or to certain payments made by an employer to an employee or former employee before that date to cancel an employment contract and relinquish contract rights. For more information, see Rev. Ruls. 2004-109 and 2004-110 in Internal Revenue Bulletin 2004-50.