When filing taxes, cannabis cultivators have a major decision to make when faced with the question: “Will you be Filing 940/941 or 943 forms for payroll?” The differences between these forms appear minor, but if the wrong form is checked, there can be significant and lasting consequences. In the following, we will explain the differences between the forms, and what you can do to avoid any issues.
Understanding the Forms
When launching any business you are required to file Form SS-4 to apply for a Federal Employer Identification Number (EIN). The EIN is a 9-digit number that is assigned to employers for tax filing and reporting purposes.
On that form is a question asking: “Will you be Filing 940/941 or 943 forms for payroll?” For the majority of cannabis operators, the answer is simple as you choose 940/941. But for cultivators it gets more complicated as Form 943 applies in some, but not all, circumstances.
Here’s details of each form and how they apply:
Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return
This is for federal unemployment tax (FUTA) which is filed once a year, but deposits are made quarterly through the Electronic Federal Tax Payment System (EFTPS). If your business files Form 940, it will also file Form 941.
There are a lot of factors that determine the unemployment rate for your business. For example, if you run a high turnover business like construction, your unemployment rate will be higher because you have more frequent employee changes and higher injury risks compared to a typical office business owner. For an average business, the unemployment rate runs around 2-3%.
At the end of the year, there is a federal unemployment tax rate of 0.006%. All of the payroll wages you have paid from January 1st – December 31st up to $7,000 will be taxed. For example, if you have four employees that you have paid $20,000 each, only the $7,000 multiplied by the four employees will be taxed.
Some states have a different unemployment rate if they have taken out bonds from the federal government. California is one of these states. Their unemployment tax rate is higher – 0.021% – because they have not paid their bond back. The federal government is getting their money back by imposing a higher unemployment tax rate on businesses located in California.
Every business files Form 940 annually on or before January 31st for the previous tax year.
Form 941 – Employer’s Quarterly Federal Tax Return
Form 941 serves two purposes. The first is to report income taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks. And the second is to pay the employer’s portion of Social Security or Medicare tax. This form is filed every quarter: January–March, April–June, July–September, October–December. If your business is filing Form 941, you must also file Form 940. 95% of business owners will file Form 941.
Those who are self-employed – like Single Member LLCs – are often shocked at the tax rate for FICA and Medicare, which is 15.3%, because they are technically paying double: for their employee (themselves) and then again as their employer (themselves) who must match that same amount. This one reason why optimal structuring from a tax perspective is so important for cannabis businesses.
Form 943 – Employer’s Annual Federal Tax Return for Agricultural Employees
Form 943 is similar to Form 941 but is exclusively for agricultural employees. Two major differences are:
- If you file Form 943, you do not need to also file Form 940.
- Form 943 is filed annually, not quarterly like Form 941.
The final and biggest difference is that Form 943 can ONLY be filed operations that are completely agricultural/cultivation. If you have anyone who is a part of the business working in an office, doing janitorial work, etc. then those workers are disqualified to be considered in Form 943. Instead you must file Forms 941 & 940. If you cannot meet the test and prove that all employees are actually out there with their hands in the ground, you cannot file Form 943 for employees.
All tax rates for 941 and 943 are exactly the same. Many cultivators prefer to file annually if they can prove that they are eligible for Form 943. The caveat here is that the entire business must be involved in the actual farming of cannabis.
Payroll tax forms are one of the many tax accounting items that seem like a troublesome bore to cannabis operators. But if you don’t pay close attention to items like this, you’ll end up paying in the future as the IRS can issue serious penalties for non-compliance. If you’re ever unsure about which tax forms apply to you, or if your business is structured optimally from a tax standpoint, please reach out to the team at GreenGrowth CPAs. We specialize in preparing and filing every cannabis tax form so you can rest easy knowing you’re not over- or under-paying and everything is compliant.