Quick overview
Employers use Form 941 when reporting payroll taxes withheld and employer payroll taxes each quarter. Use Form 940 to report annual federal unemployment (FUTA) tax. Both may apply to the same employer — they are not interchangeable. Filing the wrong form, missing deposits, or missing deadlines can trigger penalties and interest.
(Author note: In my 15+ years advising small and midsize employers, the two most common mistakes I see are failing to deposit payroll taxes on the correct schedule and assuming FUTA replaces quarterly withholding reporting.)
Key differences at a glance
- Purpose: Form 941 = quarterly reporting of federal income tax withheld and Social Security/Medicare; Form 940 = annual reporting of FUTA. (IRS: About Form 941 and About Form 940)
- Frequency: 941 = quarterly; 940 = annually (with payment rules during the year for FUTA deposits in certain cases).
- Tax base: 941 covers wages subject to income tax withholding and payroll taxes; 940 applies to the first $7,000 of wages per employee for FUTA (6.0% rate, with credit up to 5.4% for timely state unemployment tax payments, making the usual net rate 0.6%).
- Deposits: 941-related taxes are generally deposited throughout the year (monthly or semiweekly) per IRS deposit schedules; FUTA is usually deposited quarterly only if the liability exceeds $500, otherwise it can be paid with Form 940. (IRS employer tax deposit rules)
Sources: IRS About Form 941, IRS About Form 940, IRS Employer Tax Deposit Rules.
Who must file each form (practical thresholds and exceptions)
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File Form 941 if you withhold federal income tax from employees or owe Social Security or Medicare taxes on wages paid to employees, unless the IRS notifies you to file Form 944 instead. Small employers with an annual liability of $1,000 or less might be eligible to file Form 944 annually; the IRS will tell you if you qualify. (IRS Form 944 guidance)
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File Form 940 if you pay wages of $1,500 or more in any calendar quarter in the current or previous year, or if you have one or more employees for some part of a day in any 20 different weeks during the year (these are common state rules for FUTA reporting thresholds). Even if your FUTA tax is zero because of state credits, you generally still must file Form 940 if you meet the filing requirements. (IRS Form 940 guidance)
Note: State rules for unemployment insurance (SUTA) vary. FUTA interacts with SUTA because timely SUTA payments typically give you the full FUTA credit. If your state has a credit reduction year, your FUTA rate may be higher. See your state unemployment agency and IRS guidance on FUTA credit reductions.
Deposit schedules and timing (practical summary)
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Form 941 taxes (income tax withheld + employee and employer Social Security and Medicare): Deposits are made during the year based on your deposit schedule — monthly or semiweekly — determined by your lookback period. Employers with very small liabilities (generally $2,500 or less for the quarter) may deposit tax with the Form 941 instead of making deposits during the quarter. Use EFTPS for federal deposits. (IRS Publication on Employment Taxes)
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Form 940 (FUTA): FUTA is generally reported and paid annually with Form 940. However, if your FUTA tax liability exceeds $500 in a quarter, you must deposit that portion by the last day of the month following the quarter. If you deposit all FUTA taxes when due, you may be eligible to file Form 940 by February 10; otherwise Form 940 is due January 31. (IRS Form 940 instructions)
Common employer scenarios (examples)
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Small retail shop with steady payroll: Withholds federal income tax and payroll taxes each pay period. File Form 941 quarterly and Form 940 annually if FUTA filing thresholds are met. Deposit payroll taxes according to your deposit schedule.
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Seasonal business with low annual withholding: If total annual withholding and employer payroll tax liability is below the threshold for Form 944 and the IRS approves Form 944, you may file annually for payroll tax reporting instead of Form 941. FUTA obligations may still require Form 940.
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Employer paid wages but had no tax withheld (rare): If you paid nonemployee compensation, use Form 1099-NEC rules instead — that does not replace 941/940 obligations when employees are involved. See guidance on employee vs. contractor classification and payroll filings.
Real-world note: I once worked with a restaurant owner who paid a high amount in wages across the year and mistakenly treated quarterly reporting as optional. When we corrected the process, we avoided late-deposit penalties by setting up EFTPS and switching to semiweekly deposits per IRS rules.
Practical checklist: decide which form and when
- Determine worker status: employee or independent contractor. Employees trigger 941/940 obligations; contractors generally get Form 1099-NEC.
- Review wages paid and lookback period to establish your deposit schedule for payroll taxes.
- If aggregate employment taxes are low and IRS authorized Form 944, follow that guidance instead of filing 941.
- Track FUTA taxable wages at the $7,000 per-employee threshold and confirm state unemployment tax payments to claim FUTA credit.
- File Form 941 by the last day of the month after each quarter. File Form 940 by Jan 31 (or Feb 10 if you deposited FUTA timely). Pay deposits when required via EFTPS. (IRS instruction pages)
Penalties and how to avoid them
- Failure-to-file: Penalties apply if you file Form 941 late. Interest and late-filing penalties also apply to Form 940 if late.
- Failure-to-deposit: Penalties for late or insufficient deposits can be significant and are calculated by the IRS based on days late and amount.
- Trust fund recovery penalty (TFRP): If payroll taxes withheld from employees are not remitted to the IRS, responsible persons can be assessed a 100% penalty for the unpaid amount. This is one of the most severe employment tax penalties.
Avoid penalties by using payroll software or a payroll provider, scheduling calendar reminders, enrolling in EFTPS, and performing an annual payroll tax reconciliation.
For help correcting filed returns see FinHelp’s guidance on correcting employer payroll returns and Form 941-X. (See: Correcting Employer Payroll Returns: When to File Form 941-X and What to Include)
Interplay with state unemployment (SUTA) and FUTA credit
FUTA provides a credit (up to 5.4%) against the 6.0% FUTA rate when you pay state unemployment taxes timely. If your state is subject to a credit reduction (some states have had reductions in the past), your FUTA net rate can increase for affected years. Track state notices and adjust your FUTA calculation when preparing Form 940.
When to amend: Form 941-X and correcting mistakes
If you discover errors on a filed Form 941 (wrong wages, missed deposits, incorrect tax amounts), file Form 941-X — Adjusted Employer’s Quarterly Federal Tax Return — to correct the mistake. If you find an error on Form 940, follow the Form 940 instructions for corrections. Timely and accurate corrections limit penalties and interest.
For step-by-step correction strategies, see our article on correcting employer payroll returns and Form 941-X procedures.
Internal resources:
- IRS Form 941 guidance on FinHelp: “IRS Form 941: Employer’s Quarterly Federal Tax Return” (https://finhelp.io/glossary/irs-form-941-employers-quarterly-federal-tax-return/)
- IRS Form 940 guidance on FinHelp: “Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return” (https://finhelp.io/glossary/form-940-employers-annual-federal-unemployment-futa-tax-return/)
- Correction guidance: “Correcting Employer Payroll Returns: When to File Form 941-X and What to Include” (https://finhelp.io/glossary/correcting-employer-payroll-returns-when-to-file-form-941-x-and-what-to-include/)
Frequently used IRS references (direct links)
- About Form 941 — IRS: https://www.irs.gov/forms-pubs/about-form-941
- About Form 940 — IRS: https://www.irs.gov/forms-pubs/about-form-940
- Employer’s Tax Guide (Publication 15) — IRS: https://www.irs.gov/publications/p15
Final tips from practice
- Automate deposits with EFTPS and choose payroll software that separates employee withholding, employer taxes, and FUTA tracking.
- Reconcile payroll reports monthly so quarterly 941 filings are straightforward.
- Keep SUTA and FUTA records together; state payments affect your federal credit.
- If you receive a notice from the IRS about deposits or returns, act quickly and contact a tax professional — the cost of proactive remediation is far lower than penalties and potential TFRP exposure.
Disclaimer: This article is educational and not tax advice. Confirm current thresholds and rates with IRS publications or a qualified tax advisor. Tax law and IRS procedures can change; links above go to IRS guidance as of 2025.
