Differences between IRS Form 940, Form 941, and Form 944


Emptech's founder, Jeff Aleixo


Jeffrey Aleixo

IRS Form 940 Form 941 Form 944 Tax Compliance

With the multiple payroll tax obligations that employers face, it is easy to overlook some of the Internal Revenue Service (IRS) requirements, especially when it comes to different forms that all seem similar. However, if taxes are paid without the proper form or with a form that contains inadvertent or deliberate errors, the taxes are not considered paid in full, resulting in penalties. Therefore, to avoid huge and costly mistakes, employers have to understand the differences between various IRS forms, including Form 940, Form 941, and Form 944.

What is IRS Form 940

IRS Form 940 is used to calculate a business’ annual Federal Unemployment Tax Act (FUTA) tax, aimed at paying unemployment compensation for employees who have lost their jobs. Since this tax is paid by businesses, it is not deducted from employees’ payrolls.

Employers need to file IRS form 940 under the following conditions:

  • They paid wages of $1,500 or more to employees in a calendar quarter of the year, or
  • They had one or more employees working in some capacity for at least 20 weeks of the year.

IRS Form 940 is used to determine the amount of federal unemployment tax liability of a business from the previous year. It is also used to determine the amount of unemployment tax owed for the previous year and any unpaid and due unemployment taxes. Based on the business’ information from the previous calendar year, IRS form 940 should be filled out and submitted by the end of February.

Calculating Base FUTA Tax

There are 7 sections of IRS form 940 and part two determines the base amount that businesses have to pay before any adjustments are made. Since the first $7,000 of each employee’s income is taxable by the FUTA tax, all payments to all employees throughout the last calendar year should be listed, exempting certain payments and fringe benefits. Once the sum is found, it is multiplied by the effective tax rate, and the result is the base FUTA tax.

Find out what steps to follow when collecting and filing payroll taxes, and ensure compliance with different state and federal laws.

What is IRS Form 941

Also known as the Employer’s Quarterly Tax Form, IRS Form 941 is used by employers to report the federal withholdings from most types of employees. This form requires employers to report the number of employees, the amounts withheld from each of them, all Social Security withholdings, and all Medicare withholdings. It is also used to report any advances on earned income credits that are paid out to employees if this is applicable.

Generally, any employer who pays wages to an employee has to file an IRS Form 941 each quarter and continue to do so even if there are no employees during some of the quarters. The only exceptions to this filing requirement are for seasonal employers who do not pay employee wages during one or more quarters, employers of household employees, and employers of agricultural employees.

Since employers have to file a separate form for each quarter, the IRS imposes four filing deadlines that they need to adhere to. The deadlines are April 30, July 31, October 31, and January 31 of each year. The filing deadline always falls on the last day of the month following the end of the quarter.

What is IRS Form 944

IRS Form 944 helps employers and the IRS keep track of how much income tax and Federal Insurance Contribution Act (or FICA) tax that employer owes to the federal government, on an annual basis. FICA taxes, which include Social Security and Medicare, are split between the employer and employee. Therefore, businesses use Form 944 to report the income, Social Security, and Medicare taxes they withheld from employee paychecks and their own share of those taxes.

Only employers whose total annual liability is less than $1,000 are asked to file Form 944. In other words, if employers paid wages to a W-2 employee and owe $1,000 or less in withholding and FICA taxes for the year, they need to file Form 944. Employers receive a notice from the IRS regarding their eligibility to use this form instead of Form 941, based on their past tax liability. In case they have not been instructed to file Form 944, they can file Form 941 quarterly instead.

How to Make a Difference between IRS Form 940, 941, and 944

While these forms may seem similar, there are differences between them that employers need to take into account.

IRS Form 940 is filed annually and it reports an employer’s Federal Unemployment (FUTA) tax liability, which is an employer-only tax. IRS Form 941 reports federal income tax withholding and Federal Insurance (FICA) taxes, and it is filed every quarter. So, the key difference between Form 940 and 941 is that Form 940 reports FUTA tax, which is paid entirely by the employer, whereas Form 941 reports withholding and shared taxes that are split between the employee and employer.

IRS Form 944 is an alternative to Form 941 because both of these forms are used to report FICA and income tax withholding to the IRS. However, Form 944 is used only by employers whose annual FICA and withholding tax liability is less than $1,000. Therefore, whether employers use IRS Form 941 or 944 depends on the total income and FICA tax that their business owes for a year.

IRS Forms Management

In order to be tax compliant, employers need to pay attention to various IRS forms and their differences and to make sure that they are filed accurately and on time. Failure to do so and to keep proper payroll system can result in different fines, and accuracy in filling out forms is mandatory to prevent inadvertent underpayment of taxes which also incurs penalties.

However, obtaining all necessary tax-related forms such as IRS Form 940, 941, or 944 is now easier than ever with efficient, automated systems for tax management. This allows employers to submit necessary forms to proper agencies either quarterly or annually while keeping all information safe due to encryption techniques. Furthermore, they can enhance their tax compliance by preventing incorrect information, speeding up the entire process, and staying up-to-date with the latest tax laws.

Automate and simplify tax management to save on time and labor, reduce errors, and mitigate risks while avoiding costly fines.
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