When a business hires employees in the United States, its tax responsibilities increase. It is no longer just about income tax. The employer must collect certain taxes from employees’ salaries and send them to the government. Additionally, the employer must also pay certain taxes from its own funds. Here, I will explain to you how to file a US employment tax return. You will also learn about filing Form 940, 941, and W-2.
This system is called the employment tax or payroll tax. It is separate from business income tax. Even if a business makes no profit, it must still handle payroll taxes correctly if it has employees.
To report these taxes, employers use specific tax forms throughout the year.
What Are Employment Taxes?
Employment taxes are taxes connected to employee wages. Every time an employer pays a salary, several taxes are involved.
First, federal income tax is withheld from the employee’s paycheck. This money belongs to the employee, but the employer collects it and sends it to the government.
Second, there are Social Security and Medicare taxes. Together, they are called FICA taxes. Both the employer and the employee share this cost.
Third, employers must pay the federal unemployment tax. This tax is paid only by the employer and not deducted from the employee’s wages.
So, employment tax is not just one tax. It is a combination of different taxes connected to wages.
Read more: How to File a US Business Tax Return
Main Employment Tax Forms
Employers must report payroll taxes regularly. The main forms used are listed below.
| Form Name | Purpose | Who Files |
|---|---|---|
| Form 941 | Reports quarterly payroll taxes | Employer |
| Form 940 | Reports annual federal unemployment tax | Employer |
| Form W-2 | Reports annual wages and tax withheld | Sent to the Social Security Administration |
| Form W-3 | Summary of all W-2 forms | Sent to Social Security Administration |
These forms work together to ensure that employee wages and taxes are properly recorded.
Form 941 Explained
Form 941 is filed four times a year. It reports how much salary was paid, how much federal income tax was withheld, and how much Social Security and Medicare tax was collected and matched by the employer.
Even if payroll taxes are deposited during the quarter, the form must still be filed to officially report the totals.
The due dates are generally April 30, July 31, October 31, and January 31 for the previous quarter.
Form 940 Explained
Form 940 is filed once per year. It reports the federal unemployment tax, also known as the FUTA tax.
This tax helps fund unemployment benefits for workers who lose their jobs. It is paid entirely by the employer. Employees do not see this deduction on their paychecks.
The deadline for filing Form 940 is usually January 31 of the following year.
Lean more: How to File a US Individual Tax Return (Form 1040)
Form W-2 and W-3 Explained
At the end of the year, each employee receives Form W-2. This form shows total wages earned and total taxes withheld during the year.
Employees use this form to prepare their individual income tax returns.
The employer also sends copies of these W-2 forms to the Social Security Administration along with Form W-3, which acts as a summary of all employee wage reports.
The deadline for providing W-2 forms to employees is generally January 31.
How the Process Works Step by Step
When an employee is hired, they complete Form W-4. This form tells the employer how much federal income tax to withhold from each paycheck.
Each payday, the employer calculates the gross salary. Then federal income tax, Social Security tax, and Medicare tax are withheld. The employer also adds its matching share of Social Security and Medicare tax.
These amounts are deposited with the government, usually electronically.
At the end of each quarter, Form 941 is filed. At the end of the year, Form 940, W-2, and W-3 are filed.
This cycle continues as long as the business has employees.
What Happens If Employment Taxes Are Not Paid?
Employment taxes are taken very seriously in the United States. The government considers withheld taxes as money held in trust for employees.
If an employer fails to deposit or report these taxes, penalties and interest can apply quickly. In serious cases, business owners can be held personally responsible for unpaid payroll taxes.
Because of this, many businesses use payroll software or hire accountants to manage employment tax reporting.
Difference Between Employee and Independent Contractor
It is important to understand that employment tax rules apply only to employees. If a business hires an independent contractor, the business does not withhold payroll taxes.
Instead, the contractor receives Form 1099 at the end of the year and handles their own taxes.
Misclassifying an employee as a contractor can create serious legal and tax problems.
Conclusion
Employment tax returns are required when a business hires employees. These taxes include federal income tax withholding, Social Security tax, Medicare tax, and unemployment tax.
The employer must regularly report and deposit these taxes using Form 941 and Form 940. At the end of the year, employees receive Form W-2, and the government receives Form W-3.
Unlike income tax, which depends on profit, employment tax depends on payroll. Even if a company makes no profit, it must still properly report and pay payroll taxes if it has employees.
With this, your US tax return series now covers Individual, Business, Nonprofit, Estate and Trust, and Employment tax returns in a complete and easy-to-understand structure. If you want, we can now create a comparison article between the US and Pakistan tax systems to make it more relatable for your readers.
