Form 941, Line 7: Current quarter's adjustment for fractions of cents

Form 941 got you confused?  I had the same problem.  The instructions weren't clear, there were no good articles on the web about it, and even a call to the IRS didn't help.  But I finally figured it out, and since nobody else has written about it, I I'm doing so now.  That's my specialty: covering things that others haven't, or covered poorly.  Anyway, here's the scoop.

For simplicity, I assume Line 11 doesn't apply to you (since it doesn't apply to most taxpayers).

Summary

Step by Step

  1. Fill out lines 1-6 then stop.  Remember, this is just an estimate, not our true tax liability.
  2. Now we'll go to our books to find our true tax liability.
  3. If you're tracking payroll in a spreadsheet (rather than with accounting software), when you figure the SS + Medicare tax amounts, do NOT format the cells to simply show two decimal places!  Instead, forcibly round each figure to two decimal places.  For example, in Excel, =round(A15*7.65%, 2) .  In OpenOffice, use a semicolon instead of a comma.  If you're satisfied with that instruction then keep reading, if you want to know why you need to do this then scroll down for the explanation.
  4. From each individual paycheck, sum all the figures for Federal Income Tax Withholding.
  5. From each individual paycheck, sum all the figures for Social Security & Medicare withholding, then multiply that figure by 2.  (Multiply by two because the employer must match the amount the employee pays.)
  6. Add the totals from steps 4 and 5 above.  This is your true tax liability, and what you enter on lines 10 and 12.
  7. Does Line 6 match Line 10?  If not, then enter whatever you need to on Line 7 to make it equal Line 10.  (It should be a trivial amount.  If it's a lot, and you have only a few employees, your books are probably wrong.)
  8. On Line 16, get these monthly figures by summing the amounts from the individual paychecks.  If you do that, then Line 16 will equal Line 12 nicely.  Do not calculate the monthly figures by taking the total wages and multiplying by the tax rates; if you do that, then your Line 16 total will likely differ from Line 12 by a few cents.

    Ta-da!


Appendix:  Why you round the amounts in a spreadsheet rather than displaying as two decimal places

When you tell a spreadsheet to show you a figure to two decimal places, then the number it shows you might not be the actual value.  Later, when you add up all those values, you could wind up with a rounding error.

For example, if you enter =99*0.062 (the social security tax on $99) and ask to show as two decimals, the true value will be $6.138, but your spreadsheet shows you $6.14.  If you have nine employees, and you summed the tax for all those employees, your spreadsheet will do 9 x $6.138 = $55.242, which it'll show as $55.24.  However, the actual tax you're paying on each employee is $6.14, and 9 x 6.14 = $55.26, which is off by two cents.

So, to get your spreadsheet to handle this correctly, we tell the spreadsheet to forcibly round the amounts to two decimal places.  Rather than enter =99*0.062, instead we enter =round(99*0.062, 2).  Whether you round or not, what you'll see in the cell is $6.14.  The difference is that without rounding, the actual value, which you can't see, is really $6.138, and with rounding, the actual value is exactly $6.14.  When your values are exact, the total of all those values will be correct.