Apple popularized its App Store by coining the phrase, “There’s an app for that.” If the IRS is looking for a free marketing tip, I’d like to propose: “There’s a form for that.” Form 945 might be the form you needed but didn’t know existed.
Overview: What is IRS Form 945?
You know from running payroll that you’re required to withhold and remit a portion of employee pay for federal income taxes and other payroll taxes. Most of the time, non-payroll payments — which is any money leaving your company except paying employees for working — are not subject to federal income tax withholding. But when it is required, you file Form 945.
The most common reason you’ll file Form 945 is to report backup withholding for an independent contractor. Fill out Form 945 when you withhold federal income taxes from any non-payroll payment, such as an early withdrawal from a retirement plan or a contractor’s fee.
3 reasons why your business might need to fill out Form 945
You’ll have to file Form 945 under any of the following circumstances. Albeit unlikely, you may encounter a few other rare scenarios that would trigger a Form 945 filing. Check out the for more details.
1. Backup withholding
In general, you don’t withhold taxes from an independent contractor’s pay. Independent contractors pay tax on their own, and you’re not responsible for ensuring they do so. However, understand these two exceptions to that rule.
You must withhold 24% of an independent contractor’s fees as backup withholding under either of the following circumstances:
- The independent contractor does not furnish a valid taxpayer identification number (TIN).
- You receive an IRS letter that an independent contractor is subject to backup withholding.
All contractors must fill out a Form W-9, which collects their name, address, and TIN, once you pay them $600 or more in a year. You report their income by filing Form 1099-NEC the following January.
If a contractor gives you an invalid TIN — either a social security number (SSN), employer ID number (EIN), or Individual Taxpayer Identification Number (ITIN) — you must withhold 24% of the fee until the contractor provides a valid TIN. You can use the IRS’s to verify a contractor’s W-9.
You’ll get a letter from the IRS for independent contractors who failed to report or underreported 1099 income.
2. Taxable retirement plan distributions
Let’s say you want to take an early distribution on a traditional solo 401(k). You’re required to withhold 20% of the distribution for federal income taxes. You’d file Form 945 to report and pay the amount withheld.
You file Form 945 to report withholding for other types of tax-advantaged retirement plans, too. Before taking a distribution, talk to a tax professional about the tax consequences.
3. Gambling winnings
If your business awards gambling winnings, you’ll have to file Form 945 to report federal income tax withholding. You’ll withhold 24% of gambling winnings.
A winner who doesn’t provide a valid TIN will require you to collect an additional 24% in backup withholding.
How to fill out Form 945 correctly
Form 945 is somewhat uncommon, so your payroll and tax software might not be able to file it for you. Follow these steps.
1. Fill out your company information
Enter your business name, address, and employer ID number (EIN) where indicated.
Line A asks that you check the box if your business doesn't “have to file returns in the future.” Translation: Only check the box if your business is shutting down.
2. Calculate your federal withholding liability
Keep in mind as you complete the rest of the form that Form 945 only cares about federal income tax withholding for non-payroll payments. Do not enter the amount you withheld from employee paychecks. Use Form 941 for that.
On line 1, enter the amount withheld from non-payroll payments that are not backup withholding. This is where you’d report federal withholding for one participant 401(k) distributions, for example.
You report backup withholding on line 2. Report the 24% you withheld from an independent contractor here. Line 3 is the sum of the first two lines.
Line 4 asks you to report how much of the amount on line 3 you’ve already remitted to the IRS. If it’s nothing so far, put $0.
Lines 5 and 6 determine either your tax liability or tax refund amount, depending on whether you paid too much or not enough before filing.
3. If you’re withholding $2,500 or more, create a liability summary
If the amount on line 3 — your total federal income tax withholding for non-payroll items — is less than $2,500, skip this section.
For those with $2,500 or more in withholding on line 3, hold onto your hats. You need to show your liability broken down by day (yes, all 365) or month. I’d recommend letting an accountant take it from here.
To determine whether to summarize your liability by day or month, you need to consider whether your business was a monthly or semiweekly schedule depositor two years ago for non-payroll payments. Shocking, confusing, and disappointing, I know.
If you’re filing Form 945 in 2020, 2018 is the “lookback period.” You’re a monthly schedule depositor if your company reported $50,000 or less on Form 945, line 3 filed in the lookback period. Semiweekly schedule depositors reported more than $50,000.
For example, if I'm filing a 2020 Form 945, I'd look at line 3 on Form 945 from 2018 to determine whether I am a monthly or semiweekly schedule depositor.
Monthly schedule depositors will get off easier than semiweekly depositors. If you’re a monthly depositor, fill in line 7 — which is more like a table — with the monthly federal tax withholding liability for non-payroll payments. Semiweekly schedule depositors must instead file , which requires a daily breakdown of your company’s federal tax liability based on the number on line 3.
Don’t let the terminology bog you down; even the that the terms monthly and semiweekly schedule depositors “don't refer to how often your business pays its employees or even how often you’re required to make deposits.”
4. Sign, pay, and file
Sign your name and date the form. If you have a balance due — shown on line 5 — make a payment via electronic funds transfer (EFT). You can either e-file or mail Form 945 to the IRS.
If you are owed a refund, you can either request a check or put it toward next year’s filing.
When is Form 945 due?
Form 945 is due at the same time Forms 1099 and W-2 are due: January 31. In 2021, the due date is February 1 because January 31 is a Sunday. If you make an on-time tax payment, file Form 945 no later than February 10, 2021.
Don’t call 911 on 945
Form 945 goes from simple to unwieldy fast, so you wouldn’t be the first person to panic midway through. Form 945 seldom changes, so once you’ve gotten through it once, you can get it right every year.