When facing issues or litigation with the IRS, the distinction between different forms and processes is of the utmost importance. This is especially true if you are an employer handling the task of paying your employees as well as paying payroll taxes.
Forms 940 and 941 are key IRS forms that need to be completed correctly. These forms affect employer tax amounts, as well as other forms of tax liability. As an employer, it is essential that you understand and execute these forms correctly and on time.
Our team at Delia Law represents clients in a myriad of tax law areas. We are committed to providing honest, reliable information to empower employers and taxpayers.
As IRS Form 940 handles FUTA tax, it is helpful to understand what this tax is as well as your obligations as a business owner.
FUTA, or the Federal Unemployment Tax Act tax, is an employer-paid tax. Under this legislation, all employers must pay a percentage of the amount that they pay to their employees to the federal government. In the event that you lay off an employee for an issue not related to their job performance, the money from this tax helps to fund unemployment payments.
In recent years, FUTA tax rates have remained at 6%. However, this amount is subject to change annually based on several economic factors. This rate is applied only to the first $7,000 that you pay to your employees. Any amount over $7,000 will not be subject to FUTA tax.
IRS Form 940
IRS form 940 handles the Federal Unemployment Tax Act, or FUTA. This is a tax on the wages that employers pay to their employees. The only employers exempt from completing this particular form are those who work in an agriculture setting and those who employ household staff such as nannies or personal chefs. Household and agricultural businesses have alternate forms to complete. FUTA becomes mandatory when an employer pays $1,500 or more to their employees in a calendar year.
Most employers are responsible for completing IRS Form 940. If you are unsure of whether you have completed the form for the past year or have recently bought your business from another proprietor, you are not excused from FUTA law. In these scenarios, speak with a tax attorney right away about your tax status.
The deadline to file IRS Form 940 for the previous year is the end of February.
Information for IRS Form 940
You will need several pieces of information before you can complete and file IRS Form 940. The first is the current tax rate under FUTA, as this changes annually. You only have to pay FUTA tax on the first $7,000 that you pay to each employee annually.
To fill out IRS Form 940, you will also need to know the number of employees that you had during the year as well as how much you paid to each employee. Most businesses keep this information for multiple reasons.
Finally, you will need to know how much you paid in state unemployment taxes (SUTA) for the year.
Why Do I Have to File IRS Form 940?
United States law requires all employers to pay for federal unemployment benefits for their employees. This offers a safety net to employees in the event that they are fired or laid off for reasons that are not related to their behavior or job performance.
Most businesses fluctuate from year to year in areas such as employees, employee compensation, and overall size. All of these may affect the amount that a business owes under FUTA. Because of this, the IRS requires all businesses to file Form 940 annually to assess the appropriate amount for the business to pay in taxes for the given year.
It is essential that you complete IRS Form 940 on time and in the correct manner. A business tax attorney from Delia Law can help you if you have encountered problems or punishments with your business or payroll taxes.
IRS Form 941
IRS Form 941 is otherwise known as the “Employer’s Quarterly Federal Tax Return.” This is another key form for employers or business proprietors, and it must be filed quarterly rather than annually. As such, it is essential for business owners to keep track of reporting and filing the appropriate documents throughout the year, not just during tax season.
On IRS Form 941, you must report the income and payroll taxes that you withheld from your employees’ paychecks. Additionally, you may calculate Medical and Social Security taxes for each employee on IRS Form 941.
As with IRS Form 940, employers who employ farm and household workers do not need to file IRS Form 941. However, these businesses are subject to alternative taxes, so it is still essential to keep records. If a business is temporary or seasonal, the proprietor is only liable to file Form 941 for the quarter or quarters that they are in business.
Quarterly reporting helps businesses to remain abreast of their financial obligations and minimizes the amount owed during tax season. Deadlines for IRS Form 941 are:
- April 30 for Quarter 1 (Jan. 1 to March 31)
- July 31 for Quarter 2 (Apr. 1 to June 30)
- October 31 for Quarter 3 (July 1 to Sept. 30)
- January 31 for Quarter 4 (Oct. 1 to Dec. 31)
These returns must be on time or are subject to a penalty of 5% of the amount due. An additional 5% will accrue for every month that the return is late, up to 5 months past the due date.
How Do Forms 940 and 941 Differ?
Though IRS Forms 940 and 941 are similar, they are distinct. It is important for business owners to understand the differences so that they may properly complete both forms.
The most obvious difference between the forms is the frequency with which business owners must file them. Form 940 requires annual filing, while Form 941 should be filed quarterly.
The types of taxes that each form handles are also distinct. Form 941 handles expenses that are split equally between the employer and the employee, such as withholding. Form 940, conversely, deals with a tax that is solely the responsibility of the business owner. FUTA must be employer-funded, and the employee does not contribute.
Navigating Business Taxes
IRS forms 940 and 941 represent a small portion of an employer’s tax obligation. Most businesses are subject to many types of taxes, fees, and filings and must complete all processes without error and by the deadline. For small businesses especially, this can be difficult to track and remain on top of.
Having an in-house accountant can be a significant asset in these situations. As you focus on running your business, your accountant can manage the supporting documents and information needed for these forms. However, this is not enough to keep your business safe.
Hiring a business tax attorney helps to ensure that your forms have been completed correctly and that you are doing everything possible to protect your business. Unfortunately, many viable businesses are penalized or even put out of business because of late or incorrect IRS forms. A business tax attorney gives you the inside information needed to feel confident about your tax filings.
Contact Delia Law
If you are concerned about IRS Forms 940 and 941, please contact Delia Law for business tax representation.