Can I file a 940 at the end of year instead of 941's during year? I have s corp and will be using reasonable compensation based on year end income.

[TaxGuyBill · Accepted solution]

940?  Do you mean Form 944?

Probably not.

If the employment taxes (Social Security, Medicare, and withheld Federal Income Tax) are expected to be $1000 or more, a 941 is required.

If it is a seasonal business, then perhaps fewer 941s would need to be filed, but that doesn't seem to be the case here.

Also, the Department of Labor in your State likely requires regular pay periods, and only doing one payroll a year may not be allowed.  I admit, that is definitely easiest, but it likely is not legal.  From what I have heard, the IRS also highly frowns on that practice.

[abctax55]

1) NOT a ProSeries income tax prep question

2) Professional help is advised... "will be using reasonable compensation based on year end income" as this is not exactly relevant.  There are many other factors involved.

[qbteachmt]

Make sure to know the difference between Pay and File.

The 940 form is Year End reconciliation of wages paid for purposes of Federal Unemployment Tax. You pay that tax at the point you owe $500, if not earlier, and at least at year end. The Form is submitted after the end of the calendar year.

The 941/944 is 5 tax items (income tax withholding, employer and employee social security, employer and employee medicare) and this is paid per your IRS notice as either by the 15th of the month following paycheck dates, by the 3rd banking date following the paycheck dates, or by the next banking date following the paycheck dates, per the Notice you get as seen here:

https://www.irs.gov/taxtopics/tc757

You can hold the funds until it reaches $2,500 for the quarter, and you must pay by the end of the quarter, even if it hasn't reached $2,500.

The IRS tells you if you can be a 944 filer, which is End of Year reconciliation, only. Otherwise, you submit 941 quarterly, including the fourth quarter. You never use both 941 and 944.

I just spent time yesterday with someone whose CPA does "one payroll at year end after the fact for all distributions taken through the year, weekly" and explained this is not going to sit well if the IRS ever notices. They called me because they got a notice from the IRS and didn't understand it, regarding their 941 payment schedule is now changed to Semi-weekly (3 banking dates) and the lookback quarters listed shows Oct 2017 $0, Dec 2017 all the money, March 2018 $0 and June 2018 $0.

[DKarjane-PayMELLC]

As this was confusing to me, I summarized the purpose of Form 941 versus 944 versus Form 940.

In general, Form 941 is the Employer’s Quarterly Federal Tax Returns.  All employers are required to withhold federal taxes from their employee’s compensation, which includes, Federal Income tax, Social Security tax and Medicare tax.   Form 941 is used to report these taxes to the government on a quarterly basis.

Form 944: Employer's ANNUAL Federal Tax Return also is used to report payroll tax liability and payments. Form 944 is designed so the smallest employers (those whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less) will file and pay these taxes only once a year instead of every quarter.  However, before filing form 944, you must receive IRS authorization by written notice. You cannot file Form 944 without it (even if you don’t have taxes to report).

In contrast, Form 940 is an Annual form that needs to be filed by any business that has employees. This form reports the business’s federal unemployment taxes pursuant to the Federal Unemployment Tax Act (FUTA).  The business is responsible for the tax and does not come from employee wages.  This tax along with state unemployment programs pay for unemployment compensation to those workers who have lost their jobs.

Mixed in the response is a completely separate issue of pay versus file. The IRS considers depositing taxes and filing payroll tax returns (e.g., form 941) two completely separate processes. Payroll taxes are typically paid either monthly or semi-weekly, depending on the amount of employment taxes paid by the employer during the lookback period (i.e., the 12 months (covering four quarters) ending on June 30th of the prior year)). The IRS requires taxpayers to deposit all depository taxes electronically by electronic funds transfer, unless the taxpayer qualifies for a de minimis exception. The de minimis exception applies if Form 941, line 12 is less than $2,500 or line 12 was less than $2,500, and the taxpayer didn't incur a $100,000 next-day deposit obligation during the quarter.

Re form 940, even though filed once a year, an employer may have to make quarterly tax deposits. If the federal unemployment tax is more than $500 for the calendar year, at least one quarterly payment must be made. The deposit must be made by the last day of the month after the end of the calendar quarter when the amount exceeds $500.

[qbteachmt]

"Mixed in the response is a completely separate issue of pay versus file."

Yes, and that is why I included it here and when I teach Payroll. It's all applicable. If you ever supported an employer that Phone Filed their 941, then paid through EFTPS, it's important to understand File vs Pay. The threshold for Paying is important to small employers that are not Weekly or Accelerated payers and can hold that amount, especially now (since this topic is from Dec 2019...) with the 2021/2022 deferral provision.

File vs Pay is important to seasonal employers who are bounced back and forth from 941 and 944, and my training of town clerks who, as a governmental entity that is not subject to FUTA but is subject to SUTA, seem to get this confused.

And you likely would not be surprised at how many times someone filed the 944 as the Yearly Report for the quarterly 941s 🙂

"This tax along with state unemployment programs pay for unemployment compensation to those workers who have lost their jobs."

I teach it as: The Feds want the States to run UI, so they impose an administrative fee on the first $7,000 of wages payable to the Feds, then leave the States to collect the rest, to execute and figure out the UI programs. We are seeing this in action right now, of course, with both UI and PUA (Pandemic Unemployment Assistance) in force through State workforce facilities, not Fed.