Form 940: Instructions and Tips to File Federal Unemployment Tax

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What is IRS Form 940?

Form 940 is used to report the employer’s annual Federal Unemployment Tax Act (FUTA) tax. In conjunction with state unemployment tax systems, the FUTA tax provides funds for paying unemployment compensation to wage earners who have lost their jobs.

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What is FUTA Tax?

The FUTA tax is solely paid by employers and none of the tax is deducted from employees’ wages. The FUTA tax applies to the first $7,000 of wages paid to each employee during a calendar year after subtracting payments exempt from FUTA tax. For more information relative to the FUTA tax and exempt wages, please see IRS Publications 15 (also known as the Circular E) as well as IRS Publications 15a and 15b.

The current (2020) federal FUTA tax rate is 6%, although many businesses may qualify for a tax credit that lowers it to 0.6%. Keep in mind that this rate may be different at the state level. For assistance with tax credits and state levies, reach out to a Community Tax professional who can help.

Who Must File Form 940?

In general, most employers are required to file Form 940 if they:

  • Paid wages of $1,500 to any W-2 employee, OR
  • Hired one (or more) full-time or part-time W-2 employee for at least 20 weeks out of the past year

There are other specifics that apply to employers of Household Employees and Agricultural Employees.

Who is Exempt from Form 940?

Tax-exempt non-profits, religious organizations, and other accredited firms described in IRC Section 501(c)(3) are not subject to FUTA tax and do not have to file this form.

Employers who hire independent contractors under Form 1099 are not subject to compulsory payroll taxes—including the FUTA tax and FICA tax—and therefore do not need to file Form 940.

When is Form 940 Due?

The due date for filing Form 940 for any calendar year is January 31 of the following year; therefore, the filing deadline for the fiscal year 2019 is January 31, 2020.

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How to Calculate FUTA Tax on Form 940

Employers can receive a credit for amounts paid to a state unemployment fund by January 31. The FUTA tax will be higher if an employer does not pay the state unemployment tax by the due date of Form 940, so it’s wise to make estimated quarterly payments.

Although Form 940 is always based on a calendar year, an employer may have to make FUTA tax deposits prior to filing the form. If your FUTA tax is $500 or less in a quarter, then a deposit is not required.

However, you must carry that liability over to the next quarter until your cumulative tax is greater than $500, after which time you must make the deposit for the cumulative total no later than the last day of the month following the end of the quarter.

So, whenever an employer reaches the minimum amount in estimated annual taxes, a deposit is required in the corresponding quarter in order to receive the reduced tax rate. Deposits should be made in a timely fashion to avoid penalties and interest.

If the employer did not pay state unemployment tax, or if wages were exempt from state unemployment tax, then the FUTA tax may increase to an additional 5.4% of the first $7,000 of wages per employee. The FUTA tax rate may also increase if an employer operates in a “credit reduction state”.

Note: Form 940 does not have a line on it relative to the “state credit” because it is not a tax credit, per se, but Part 1 of this form does show state-specific information relative to the state or states to which an employer remits state unemployment tax. We’ll go over filing instructions for IRS Form 940 below.

IRS Form 940 Instructions

Form 940 can be broken down as follows:

The first section is basically information about the employer entity.

  • Part 1 is for state-specific information, and depending on the circumstances, the employer may have to complete and submit Schedule A (Form 940.)
  • Part 2 is the actual calculation of the FUTA tax.
  • Part 3 calculates any addition to the FUTA tax that may be determined based on relevant state-specific information.
  • Part 4 depicts the FUTA tax, deposits made during the year, and any balance due with Form 940, or any overpayment applied to the next years’ return.
  • Part 5 is a recap of the FUTA tax liability by quarter.
  • Parts 6 and 7 have information about the paid preparer (if there is one) and the employer’s responsible party.

How to File Form 940

Where you file Form 940 depends on what state the business operates in and whether you’re making a payment with the return. You have two different options to file Form 940 with the IRS:

  1. You can e-file using the IRS Electronic Federal Tax Payment System (EFTP), OR
  2. Mail in the form using the states and addresses listed on the IRS Form 940 instructions

The Difference Between Form 940 and Form 941

Whereas Form 940 is used to report an employer’s annual unemployment tax, Form 941 is used to report quarterly payroll taxes. The taxes reported in the latter include:

  • FUTA tax
  • Federal income tax withholding
  • FICA tax withholding for Social Security and Medicare

These small business tax forms and their due dates are often confused by their similarity. For more information about payroll taxes, or any other type of tax assistance, Contact Community Tax for a FREE consultation!

The IRS tax code can be difficult to navigate, but our team of CPAs, tax preparers and practitioners can provide the tax solutions you need to ensure that your business continues to grow and stay out of problems with IRS.

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