According to the IRS, “fractions-of-cents” adjustments refer to the rounding differences related to the employee portions of social security and Medicare taxes.
Where will I notice a fractions-of-cents adjustment?
You might have a fractions-of-cents adjustment if you notice a small difference between your total taxes after adjustments and credits and your total deposits on Form 941 or Form 944. On Form 941, you might notice different amounts on line 12 and line 13. On Form 944, you might notice different amounts on line 9 and line 10.
What causes fractions-of-cents differences?
Every time you run payroll, social security and Medicare taxes are calculated. Since the resulting calculation will often include fractions-of-cents, the amount is rounded to the nearest cent to determine the actual amount to withhold.
When calculating your tax liability on Form 941 or Form 944, social security and Medicare taxes are calculated based on the total taxable wages for the period. Because the amount will only be rounded to the nearest cent once, this amount may be different than the actual amount withheld.
How do I know if I have a fractions-of-cents adjustment?
Step 1. Calculate the employee portions of social security and Medicare taxes for the reporting period.
- Multiply your total wages and tips subject to social security taxes by 6.2% (or 0.062).
- Multiply your total wages and tips subject to Medicare taxes by 1.45% (or 0.0145).
- Multiply your total wages and tips subject to Additional Medicare Tax by 0.9% (or 0.009).
Step 2. Compare the employee portions of social security and Medicare taxes calculated in Step 1 to the actual amounts withheld from your employees and reported on Form 941 or Form 944.
Step 3. Report the difference.
- If the actual amount withheld is less than the employee portions calculated in Step 1, then enter a negative adjustment on Form 941, line 7 or Form 944, line 6.
- If the actual amount withheld is more than the employee portions calculated in Step 1, then enter a positive adjustment on Form 941, line 7 or Form 944. Line 6.
I paid one employee during the quarter. They were paid $1,123.23 on a biweekly basis.
Each paycheck, the following taxes were withheld:
- Social security taxes: $69.64 ($1,123.23*0.062=$63.64026)
- Medicare taxes: $16.29 ($1,123.23*0.0145=$16.286835)
If I paid the employee 7 times during the quarter, I would have paid them $7,862.61 and withheld a total of $487.48 in social security taxes and $114.03 in Medicare taxes.
Let’s compare that to your employee’s total tax liability:
- Social security taxes: $487.48 ($7,862.61*0.062=487.48182)
- Medicare taxes: $114.01 ($7,862.61*0.0145=$114.007845)
You’ll notice that the Medicare tax liability is $0.02 less than the Medicare tax withheld.
Workful will do all these calculations for you and update your Form 941 to include any fractions-of-cents adjustments.