What is the Difference Between IRS Form 940 and Form 941?

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Business Tax 940

There are few things more rewarding in life than building a business from the ground up and working toward making it successful. 

That’s one of the many reasons behind the fact that the US now has nearly 30 million entrepreneurs.

But, not everyone is fully educated on the different tax forms they need to file as business owners. In particular, both IRS form 940 and 941 can cause confusion while filing business taxes.

Not sure where to start? Don’t worry, we’ve got you covered.

Let’s take a look at everything you need to know.

Form 940

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.

Form 940 must be filed by January 31st, 2020.

Form 941

Employers are required to file this form to report their quarterly taxes. This includes things like Social Security, Medicaid, and federal income taxes.

These taxes are required to be withheld from your employees’ wages (the amount may change depending on their annual compensation).

The amounts that you’re required to report on form 941 include:

  • Employee wages
  • Withheld federal income tax
  • Employer and employee Medicare/social security taxes

After you file a 941, you must file this form during each quarter, even if you don’t have any taxes to report for that time period. They’re due on the last day of the month following the end of each quarter.

To clarify, the due dates for each quarter are as follows:

  • Q1- April 30th
  • Q2- July 31st
  • Q3- October 31st
  • Q4- January 31st

If you pay your taxes in full before the end of the quarter, however, you’re given an extension of just under six weeks to file form 941. This can be particularly beneficial for companies that are notably busy toward the end of each quarter.

In general, though, it’s a good practice to have your forms ready before the standard due date.

What If I Sold My Business?

If you happened to sell your company before filing form 941, you might feel lost when thinking of your next move. But, it’s rather simple.

If you sell your business to another party, both you and the company’s new owner need to file this form. You are only required to report wages that you paid to your employees.

The new owner needs to file a regular return for the quarter in which the sale took place, while the former owner needs to file a final return.

Similarly, you’ll also need to file a final return if your company goes out of business, or you no longer pay wages to employees of your company.

The Key Differences

The main difference between the two forms is that form 940 doesn’t apply to companies who don’t have employees working for them. 

These business owners are still responsible for paying state unemployment tax, though. 

Additionally, form 940 is required to be filed annually, while business owners must file form 941 quarterly. 

Most owners are required to file form 941. There are a few exceptions, including:

  • Those who hire employees seasonally
  • Employers who hire household employees
  • Employers who employ agricultural employees

Even if you had no employees working for you for an entire quarter, you’d still need to file form 941 if you’ve submitted it before, as you’re required to file one each quarter after you do file for the first time.

Final Thoughts

It’s crucial to understand your tax obligations when it comes to these forms in order to avoid incurring tax penalties or owing money to the IRS later on.

Specifically, failing to file these forms when you’re required to can result in a penalty for both not filing as well as submitting your forms late once you do file.

Put simply, make sure you stay on top of your quarterly and annual tax obligations.

Handling IRS Form 940 and 941 Can Seem Difficult

But it doesn’t have to be.

With the above information about IRS form 940 and 941 in mind, you’ll be well on your way to ensuring that you take care of your tax obligations as a business owner.

Want to learn more about taxes and making sure you pay the appropriate amount? This article has plenty of useful info.

Managing Partner of Silver Tax Group, author of the book “Stop the IRS”. Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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