Paying independent contractors and other non-employees is simpler than paying employees because you don’t usually have to withhold federal income taxes. But there are times when small businesses must withhold payments to non-employees for backup withholding and other purposes.
Find out more about Internal Revenue Service (IRS) Form 945 and how to use it to report backup withholding or other withholding amounts each year.
- IRS Form 945 is an annual report of federal income tax withholding for non-employees.
- This form is commonly used to report backup withholding, which is required if a payee’s tax identification number (TIN) is missing or incorrect.
- Form 945 is due on Feb. 1 for the previous year’s taxes.
- You may pay amounts withheld from all payees when you file Form 945 if the total is $2,500 or less for the year.
What Is Form 945?
IRS Form 945, the “Annual Return of Withheld Federal Income Tax,” is used to report federal income tax held out of several different kinds of payments. A small business may need to use Form 945 to report backup withholding from non-employees. It may also be used for withholding from:
- Individual retirement accounts (IRAs)
- Voluntary withholding on certain government payments
When Do You Need To File Form 945?
After the end of each year, if you have withheld federal income tax from payees, you must:
- Make periodic payments of amounts withheld to the IRS.
- File Form 945 to report the total withholding amount for all payees.
Depositing Form 945 Withholding Amounts
If the total amount of federal income tax you withheld from all payees during the year is $2,500 or less, you may pay the amount due when you file Form 945.
If the total is over $2,500 for the year, you must make either monthly or semiweekly deposits depending on the total withholding amount for the year. You may make monthly deposits if your total withholding for all payees is $50,000 or less. If the total is more than $50,000, you must make semiweekly (twice a week) payments.
If you are mailing your payment along with Form 945, you must use the payment voucher on page 2 of the form to be sure the IRS records your payment correctly.
Filing Form 945
You must file Form 945 for a tax year by Feb. 1 of the following year. For example, a Form 945 for 2021 would have to be filed by Feb. 1, 2022. If you have made deposits on time and in full for the year, you have until Feb. 10 to file Form 945. The filing deadline is extended to the next business day if the due date for a year falls on the weekend or holiday.
The postmark date determines whether the form has been filed on time if it has enough postage and is postmarked by the U.S. Postal Service. You may also use an IRS-designated private delivery service.
When To Take Backup Withholding
Small businesses don’t normally need to withhold federal income taxes from non-employees, but there are some cases when this is necessary. Backup withholding is normally required when the taxpayer ID number of a payee is missing or incorrect on the W-9 form used to report taxpayer IDs of non-employees.
You must take backup withholding from payments at the rate of 24% of the amount paid. For example, if you paid a freelance web designer $1,000 for work creating your website, you must withhold $240 in federal income taxes from the payment. This applies to payments to an independent contractor that are reported on Form 1099-NEC for non-employee compensation and other payments reported on other 1099 forms.
If backup withholding is required, you will receive a notice from the IRS. You must immediately begin withholding federal income taxes from payments to this payee and continue until the payee gives you a validation letter from the IRS or shows you a current Social Security card.
How To Complete Form 945
Before you complete this form, you will need to gather some information.
Add all the federal income taxes you withheld from all payees for Form 945 and separate the backup withholding from other types of withholding.
Gather information about any payments you made to the IRS during the year for Form 945 withholding.
Don’t include withholding amounts and payments for federal income tax withholding on Form 941 and Form 944. These forms are used for reporting withholding and deposits for employees.
Preparing Form 945
Line 1: Enter the federal income tax withheld for all payees except for backup withholding.
Line 2: Enter the total backup withholding for the year.
Line 3: Total Lines 1 and 2.
Line 4: Enter the total deposits you made for the year.
If Line 3 is more than Line 4, enter the difference on Line 5. If Line 4 is more than Line 3, enter the difference on Line 6.
Select the appropriate box: "Apply to Next Return" or "Send a Refund."
Line 7: This amount is the total of federal income taxes you owe, not deposits you made. It must equal the amount on Line 3.
Monthly depositors must use Line 7 (a box) to detail their tax liability for each month. Semiweekly depositors must complete Form 945-A to detail all deposits for the year.
How To File Form 945
You may also mail in your form to the IRS. The filing address depends on where your business is located and whether you are making a payment with the form. The mailing addresses are on page 3 of the Instructions for Form 945.
Frequently Asked Questions (FAQs)
How do I deposit taxes for Form 945?
You can use the IRS Electronic Federal Tax Payment System (EFTPS) or a bank wire transfer. You may use a payment voucher if:
- Your total taxes for the year on Form 945 Line 3 are less than $2,500 and you are paying in full with your return by the due date, or
- You make payroll tax deposits using the monthly deposit schedule. If so, you can pay with the voucher for any amount due.
When is Form 945 due?
Form 945 is an annual withholding report due on Feb. 1 following the tax year. If the due date falls on a weekend or holiday, the form is due the next business day. If you have made all your deposits on time and in full, the due date is Feb. 10. To avoid late-filing penalties, make sure your mailed-in form has the required amount of postage and that it is postmarked on or before the due date.