940 vs 941 Differences: Avoid IRS Form Mix-Ups That Could Cost You Big

Form 940 is used to report federal unemployment taxes, while Form 941 is used to report Medicare, Social Security, and federal income tax withholding. Generally speaking, Form 940 is due every January 31st, while Form 941 is due one month after the end of each quarter. However, there may be some exceptions to this depending on your specific situation. Make sure you file these forms correctly so that there are no problems later on. Not sure where to start? Don’t worry, we’ve got you covered. Let’s take a look at everything you need to know.

IRS Form 940 Explained

The IRS form 940 is the federal unemployment tax return form. Any business owner that has employees working for them must file a 940 form with the IRS. The purpose of this form is to report your Federal Unemployment Tax Act (FUTA), which aims to support those who are actively seeking employment financially. Specifically, the FUTA tax applies to the first $7,000 you pay each of your employees. If there are FUTA-exempt payments, you don’t factor those in when calculating the $7,000. It’s also vital that you don’t deduct FUTA obligations from your employees’ wages. Business owners will need to file form 940 under the following conditions:

• You paid wages to an employee that exceeded $1,500 within a single quarter
• An employee showed up to work at least once during 20 of the weeks within the last calendar year

To further clarify the second scenario, if an employee showed up to work for even an hour for 7 days, it counts as a week toward the 20. So, if this scenario occurred 20 times within a calendar year, you would be obligated to file form 940. This also includes part-time and temporary employees. To fill out the form as quickly and accurately as possible, make sure you keep the following info in mind:

• Include your company name and employer identification number (EIN) on every page
• Don’t use decimal points or dollar signs. You may choose to apply or omit commas.
• You can round amounts to the nearest dollar. If you do, though, you must do it for all dollar values.
• If the value of a particular line is zero, don’t write anything at all.

IRS Form 940 Details

Ever wonder what happens when employees get laid off or terminated from their job? The funds collected from the unemployment tax are paid to these individuals. The tax rate for unemployment taxes is based on individual employee salaries and taxes. A maximum of $7,000 can be paid per employee towards unemployment taxes. The average unemployment tax rate is 6%. However, if unemployment taxes are paid, the rate for unemployment taxes is 5.4%. This 5.4% rate is a type of credit that’s paid towards unemployment taxes within the state that your business operates in. Keep in mind that each state has a unique unemployment tax rate. If you don’t understand your state-specific tax rate, you should check the US Department of labor for state unemployment tax rates.

Credit Reductions

To figure out how much you owe in FUTA taxes, you need to know if any states where you pay SUTA (state unemployment taxes) are credit reduction states. Credit reduction states are states that have not repaid money they borrowed from the federal government to fund their unemployment programs. When you pay state unemployment taxes, you can get a 5.4% credit on the FUTA tax, which is 6% of the first $7,000 of each employee’s wages. However, since these states haven’t paid back what they owe, they don’t get the full credit and so there is a penalty. If your business has employees in multiple states, make sure to check whether any of them are in credit reduction states. If so, you will owe a bit more in FUTA taxes. FUTA tax is only paid by employers and it is not collected or deducted from employees’ wages.