What Is Included on Form 941 Line 2?

Form 941, the Employer’s QUARTERLY Federal Tax Return, is a standard filing for most businesses with employees. Correctly reporting employee compensation is an important part of this form. This article provides a focused explanation of the figure required for Line 2, which asks for the total wages, tips, and other compensation paid during the quarter.

Defining Compensation for Line 2

This figure is comprehensive and includes more than just regular hourly wages or salaries. The amount reported on Line 2 should align with the amounts that would be included in Box 1 of your employees’ Forms W-2. It represents the total pay subject to federal income tax, which is calculated after certain pre-tax deductions are subtracted from an employee’s gross pay.

The total includes all standard wages, such as regular pay, salaries, and any overtime paid during the quarter. All tips that employees report to the employer must also be included in this total.

Beyond standard wages and tips, “other compensation” covers a wide array of payments. This category includes:

• Bonuses, commissions, vacation pay, and severance pay
• The value of certain taxable fringe benefits, such as the personal use of a company vehicle
• Group-term life insurance coverage exceeding $50,000
• Employer-paid health insurance premiums for S corporation owners who are 2% or greater shareholders

Payments to Exclude from Line 2

Certain payments made by a business are not considered compensation for the purposes of this line item.

A primary exclusion is payments made to independent contractors. These individuals are not employees and their compensation is reported separately on Form 1099-NEC. Another common exclusion is expense reimbursements made to employees under an accountable plan. An accountable plan is a system for reimbursing workers for business expenses that requires them to substantiate the costs and return any excess reimbursement in a timely manner.

Employer contributions to employee benefit plans are also excluded from Line 2. This includes employer contributions made to qualified retirement plans, such as a 401(k) or similar plan. Employer payments toward certain health benefit plans, like contributions to employee Health Savings Accounts (HSAs) or the employer-paid portion of health insurance premiums for most employees, are not included in the Line 2 total.

Finding the Total in Your Payroll Records

After understanding what payments to include and exclude, the final step is to locate the correct figure within your business records. Most modern payroll software systems are designed to simplify this process. These systems generate quarterly payroll reports that provide the specific numbers needed for Form 941.

When reviewing your payroll documents, look for a report often titled “Quarterly Payroll Summary” or “Tax Summary.” Within this report, you should look for a line item specifically for wages subject to federal income tax, which may be labeled “Federal Taxable Wages” or a similar term. This figure is the aggregate amount paid to all employees after pre-tax deductions, such as employee contributions to a 401(k) or certain health insurance premiums, have been subtracted.