Employers in the United States must file mandatory forms related to employment tax reporting. Two such important forms are Form 940 and Form 941. Though they may seem similar, in reality, these forms are used to report different types of taxes and serve completely different purposes. Understanding these differences is key to complying with the filing requirements and avoiding any financial penalties.
In this article, we will be doing a head-to-head comparison of Form 940 vs. Form 941 to help you better understand their differences in employment tax compliance.
What Are Forms 940 and 941?
Forms 940 and 941 are important payroll tax forms that employers must file to meet their responsibilities. These forms have unique filing requirements and different processes. Below is a detailed explanation of these forms.
What Is Form 940?
Form 940 is used to report the Federal Unemployment Tax Act or the FUTA tax. This is a federal tax that employers must pay to support those individuals who are unemployed and actively looking for a job. A notable aspect of the FUTA tax is that this is paid fully by the employer and is not withheld from an employee’s salary.
Form 940 is an annual payroll tax return that the employer must file before January 31 of the next year. The FUTA tax rate is 6% and applies only to the first $7,000 (called the FUTA wage base) an employer pays to each employee. This is for the federal tax, and the state wage base can be different based on the state. In general, if an employer pays into any state unemployment fund, a credit of 5.4% is given by the IRS at the time of filing Form 940. This means the effective rate payable will only be 0.6%
This form must be filed only by those employers who paid wages of $1,500 or more to employees in a calendar year. Also, the employer must have had one or more full-time, part-time, or temporary employees for at least 20 weeks during the year.
The following employers do not have to file:
- Tax-exempt non-profit organizations.
- Household employers, provided they have not paid more than $1,000 in wages to any employee.
- Agricultural employers, provided they have not paid more than $20,000 in a calendar year to any farmworker. Also, they must not have employed more than 10 farmworkers for at least 20 weeks in a year.
- State or local government employers.
- Federally recognized Indian tribal government employers.
What Is Form 941?
Form 941 is a quarterly payroll tax return that is used to report the federal taxes withheld from an employee’s wages. Specifically, it is used to report federal income tax, Social Security tax, and Medicare tax withheld from employees, as well as the employer’s share of Social Security and Medicare taxes. This form must be filed at the end of every quarter, before April 30, July 31, October 31, and January 31, respectively.
This form must be filed by all employers, except seasonal employers who file only in the quarters in which they operate. Also, businesses that hire farmworkers and household employers do not have to file this form. Lastly, businesses that pay less than $1,000 in wages to employees must file Form 944 instead of Form 941.
On this form, employers must report the following items:
- Employer Identification Number (EIN), business name and address, and trade name if applicable.
- Total wages paid to employees during that quarter, including the tips reported by employees.
- The total number of employees, including full-time and part-time workers.
- All federal income tax withholdings.
- All Medicare and Social Security taxes are withheld from employees’ wages.
- The employer’s share of Medicare and Social Security tax.
- Any quarterly adjustments made to account for sick pay.
- Any payroll tax credit received for research activities.
Understanding the differences between Form 940 vs. Form 941 can better help you meet your tax filing obligations. For new business owners who find these forms challenging, Manay CPA’s experts can guide you through this process.
Key Differences Between Form 940 and Form 941
Business owners must understand the purpose and filing procedures for both these IRS employer forms to ensure employment tax compliance. Below are their key differences:
Purpose of Each Form
Out of the two, Form 940 is used for reporting the FUTA tax, which is used for providing financial assistance to the unemployed in the U.S. This tax is paid directly by the employers and is not withheld from an employee’s paycheck. In contrast, Form 941 is used for reporting the taxes that are withheld from an employee’s paycheck, like the federal income tax, Medicare, and Social Security tax. This form also includes the employer’s share of Medicare and Social Security tax.
Filing Frequency
Another key difference between the two forms is their filing frequency. Form 940 is an annual payroll tax return that is filed once a year before January 31. On the other hand, Form 941 is for quarterly payroll taxes and is filed at the end of every quarter – April 30, July 31, October 31, and January 31.
Taxes Covered
Form 940 applies to the FUTA tax paid by the employer. This is calculated at the rate of 6% on the first $7,000 paid to each employee. If the employer also pays state unemployment taxes, then a rebate of 5.4% is offered, reducing the effective payable rate to 0.6%. When it comes to Form 941, withheld federal income taxes, Medicare tax, and Social Security taxes are reported along with the employer’s share.
Who Needs to File Each Form?
In general, all employers must file both these forms. Exemption from filing Form 940 is given to those employers who paid less than $1,500 in annual wages to employees and those who employed people for less than 20 weeks in a year. Similarly, household employers who paid less than $1,000 in wages and seasonal employers need not file Form 941. Instead, they must file Form 944.
Thus, these are the major differences between the two forms. For further questions, reach out to Manay CPA.
When and How to File These Forms
Employers must file both these forms before the deadlines specified by the IRS to avoid heavy penalties. Below are the filing deadlines for each form:
- Form 940 – Before January 31.
- Form 941 – At the end of every quarter: April 30, July 31, October 31, and January 31.
You can file both these forms electronically through the Modernized e-File System (MEF). The IRS also recommends this method, so processing is likely to be faster. Besides MEF, these forms can be filed using third-party software tools as well.
The other option is to download the forms from the IRS pages, fill them out manually, and mail them to the IRS addresses mentioned below:
If employers are required to make a payment on either of these forms, they can write a check to the U.S. Treasury and mail it along with the form. Alternatively, they can pay digitally through the Electronic Federal Tax Payment System.
Common Mistakes to Avoid When Filing Forms 940 and 941
Errors are possible when filing these payroll tax forms, especially for those who do not have the experience. Below are some common mistakes to avoid while filing Forms 940 and 941:
- Check if all the fields are filled, as this can lead to rejections and penalties.
- Calculate the FUTA tax accurately if you qualify for credits from state unemployment taxes.
- If an employer operates across multiple states, make sure to provide the credit reduction for each state through the Schedule A form.
- Keep track of the filing dates and file the forms much before the due date.
- Reconcile all withheld payments including the credits received for sick pay and other exemptions. Verify these calculations before submitting Form 941.
- Using the wrong form to report payment. For example, instead of filing FUTA tax in Form 940, combining it with Form 941’s payments.
With a good understanding of these forms, employers can avoid mistakes and the possible penalties that result from them.
How to Stay Compliant with Payroll Tax Reporting
There are many ways to stay compliant with payroll tax reporting. Being accurate with these filings reduces time and effort as you don’t have to deal with returns and amended filings. More importantly, it avoids any financial losses due to penalties.
Here are some ways to achieve employment tax compliance:
- Maintain detailed and accurate records of all amounts withheld from employees for Form 941. This recordkeeping will come in handy for future tracking.
- File before the deadline.
- Verify and calculate FUTA tax.
- Use tax accounting software to automate filings, as they can save time and effort while improving accuracy.
- Take help from experts if your payroll calculations are complex and involve multiple states.
With these best practices, you can comply with the tax reporting processes and forms.
Choosing the Right Payroll Tax Forms for Your Business
To conclude, choosing the right payroll tax forms helps meet the IRS requirements. Form 940 vs. Form 941 is a common question that many business owners have, and in this article, we explained how they are different. Form 940 is used for filing FUTA tax while Form 941 is for reporting withheld federal income taxes and employer’s contributions to Medicare and Social Security Tax. Additionally, filing them before the stipulated deadlines and in the specified manner avoids penalties.
Despite this information, some payroll taxations can be complex and confusing. Also, it can be difficult to stay on top of any changes to these forms. For further questions and clarifications, schedule a free consultation with Manay CPA, as they have the experience to guide you through this filing process.
