An Overview of Form 940 vs 941
There are different tax forms that you need to file throughout the year if you own a business. Two of these forms, 940 and 941, are related to employment taxes.Â
| Form 940 | Form 941 | |
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Due Annually |
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Due Quarterly |
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Federal Unemployment Taxes |
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Medicare Tax |
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Social Security Tax |
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Federal Income Tax Withholding |
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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.Â
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.Â
The average unemployment tax rate is 6%.
However, if unemployment taxes are paid, the rate for unemployment taxes is 5.4%.Â
This 5.4% rate is a type of credit that’s paid towards unemployment taxes within the state that your business operates in.Â
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.
Get Expert Filing Help With Your Tax Forms
Ensure your yearly 940 & quarterly 941 estimated taxes are prepared and filed properly to avoid IRS issues.
Get StartedWhy IRS Form 940 is Important
The federal unemployment tax act created the IRS form 940. This act provided guidelines for states and how they should handle unemployment benefits.
The federal government’s unemployment tax act was an important step in providing financial support to individuals who lost their jobs because of conditions outside the individual’s control.
IRS Form 941 Explained
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
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.
The Key Differences Between Forms 940 and 941
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.Â
Additionally, form 940 is required to be filed annually, while business owners must file form 941 quarterly.Â
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
Note: 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.
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.
Frequently Asked Questions About Forms 940 and 941
A) Any business that has employees must file form 940Â with the IRS under the Federal Unemployment Tax Act (FUTA)Â annually.
A) Employers, or really anyone who has employees are required to file form 941 to report their quarterly taxes, which includes Social Security, Medicaid, and federal income taxes. This is required even if there are quarters in which you did not have any employees.
A) Form 940 is filed annually, while Form 941 is filed quarterly. Also, Form 940 does not apply to business who don't have any employees
A) If you sold your business before filing form 941, both you and the new owner must each file a separate form 941, which must be filed quarterly.
Don't Stress About IRS Forms, Work With a Legal Professional
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.
Get Help With IRS Forms 940 & 941
Taking on the unnecessary stress of filling out tax forms may seem difficult. But the good news is that no longer has 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 further details that can help guide you.
