Form 940 is an essential document for employers in the United States, as it is used to report their annual Federal Unemployment Tax Act (FUTA) tax. The FUTA tax helps fund state unemployment insurance programs, providing financial support to workers who have lost their jobs. Employers are required to complete and submit Form 940 to the Internal Revenue Service (IRS) if they meet specific criteria, such as paying wages of $1,500 or more to employees in a calendar quarter or employing at least one person for a portion of a day in any 20 or more different weeks in the past two years.
Understanding Form 940 is crucial for employers to ensure they accurately calculate their FUTA tax liability and adhere to the required filing deadlines. The form consists of several sections where employers must provide their identification details, compute their FUTA tax for each quarter, and determine if they can claim any credits or adjustments. In some instances, employers operating in multiple states or addressing particular taxable wage exclusions may need to consider additional factors when completing the form.
Key Takeaways
- Form 940 is used by employers to report their annual FUTA tax, supporting state unemployment insurance programs.
- Accurate calculation of FUTA tax liability and adherence to filing deadlines are crucial for employers.
- Employers must be aware of credits, adjustments, and multi-state employment considerations when completing Form 940.
Understanding Form 940
Basics of Form 940
Form 940 is an annual tax form filed by employers to report their Federal Unemployment Tax Act (FUTA) payments and calculations to the Internal Revenue Service (IRS). The FUTA tax helps fund unemployment compensation for workers who have lost their jobs. Employers are responsible for paying this tax, not employees. The form has various sections to report wages paid, taxable wages, and calculate the total FUTA tax liability.
The FUTA tax rate is typically 6% of the first $7,000 paid to each employee during a calendar year. However, employers may receive a credit up to 5.4% for paying state unemployment taxes, effectively reducing the FUTA tax rate to 0.6%.
Eligibility for Filing
An employer must file Form 940 if:
- They paid wages of $1,500 or more to employees in a calendar quarter, or
- They had one or more employees for part of a day in any 20 or more different weeks in the past two years.
It is important for eligible employers to file Form 940 by the specified deadline, which is generally January 31st of the following year. Late filing or payment can result in penalty fees and interest charges.
When filing Form 940, employers must report their total annual wages, taxable wages under FUTA, calculate the total FUTA tax, and state any adjustments or credits claimed. It is crucial to provide accurate information, as the IRS uses this data to assess tax compliance and correctly fund unemployment compensation programs.
Calculating FUTA Tax Liability
Determining Taxable FUTA Wages
To calculate the Federal Unemployment Tax Act (FUTA) tax liability, one must first determine the taxable FUTA wages. Taxable FUTA wages are the first $7,000 paid to each employee per calendar year. It’s essential to note that FUTA tax is only paid by the employer and not withheld from employee wages. These wages are subject to FUTA tax regardless of whether they are part-time, temporary, or full-time employees.
Here’s a brief, step-by-step guide to determining taxable FUTA wages:
- Identify all employees: List all the employees on the payroll.
- Determine each employee’s wages: Calculate the total wages paid to each employee during the calendar year.
- Apply the $7,000 wage limit: For each employee, include only the first $7,000 of wages in the taxable FUTA wages calculation.
FUTA Tax Rate Calculation
Once the taxable FUTA wages have been determined, the next step is calculating the FUTA tax owed. The FUTA tax rate is 6%, but employers can receive a credit against this tax rate for paying state unemployment taxes. The maximum credit is 5.4%, which results in a net FUTA tax rate of 0.6% for employers eligible for the maximum credit.
Here’s a simple calculation for the FUTA tax liability:
Taxable FUTA Wages × FUTA Tax Rate = FUTA Tax before adjustments
To illustrate, let’s assume an employer has determined their taxable FUTA wages to be $17,600. Using the net FUTA tax rate of 0.6%, the employer will calculate the FUTA tax liability as follows:
$17,600 × 0.006 = $105.60
In this example, the employer’s FUTA tax liability before adjustments is $105.60. It’s essential for employers to ensure they pay their state unemployment taxes promptly and in full to maximize the credit and minimize their FUTA tax liability.
Filing Requirements and Deadlines
Filing Deadline
Employers are required to file Form 940 annually to report their Federal Unemployment Tax Act (FUTA) tax. The filing deadline for Form 940 is typically January 31 of the following year. For example, if you are filing for the 2023 tax year, the deadline would be January 31, 2024. If the due date falls on a weekend or public holiday, the deadline extends to the next business day.
When filing Form 940, employers should ensure that their Employer Identification Number (EIN) is correctly entered on the form.
Deposit Requirements
Under FUTA, employers are responsible for depositing the tax accumulated throughout the year. Employers must deposit their FUTA tax on a quarterly basis if their accumulated liabilities exceed $500 for a calendar quarter. If the tax due is $500 or less, the employer can carry it over to the next quarter and continue to accumulate tax until their liability exceeds $500. At that point, a deposit must be made.
Here are the deposit due dates for each quarter of a calendar year:
- 1st Quarter (January – March): Deposit by April 30
- 2nd Quarter (April – June): Deposit by July 31
- 3rd Quarter (July – September): Deposit by October 31
- 4th Quarter (October – December): Deposit by January 31 of the following year
If employers have deposited all FUTA taxes when due, they are granted an additional 10 calendar days to file Form 940. By adhering to the deposit schedule and filing Form 940 by the deadline, employers can ensure compliance with FUTA requirements and avoid potential penalties.
FUTA Credit Reductions
Understanding Credit Reduction
The Federal Unemployment Tax Act (FUTA) is a tax paid by employers to help fund unemployment benefits for workers who lose their jobs. The standard FUTA tax rate is 6.0%, but employers can generally receive a credit of 5.4% when they file their Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. This results in a net FUTA tax rate of 0.6% (6.0% – 5.4% = 0.6%). However, in some cases, credit reductions can apply, leading to a higher FUTA tax rate for those employers.
A credit reduction occurs when an employer has to pay additional FUTA tax due to their state having outstanding federal unemployment insurance loans. For example, if an employer operates in a state with a credit reduction of 0.3%, their FUTA tax rate would be calculated by subtracting a reduced credit of only 5.1% (5.4% – 0.3%) from the standard 6% FUTA tax rate, resulting in a final FUTA tax rate of 0.9% (6.0% – 5.1% = 0.9%).
Identifying Credit Reduction States
Employers can identify if they are in a credit reduction state by referring to the specific year’s Schedule A (Form 940), which lists all states subject to a credit reduction. The Schedule A is published annually by the Internal Revenue Service (IRS) and outlines the credit reduction percentage for each affected state.
To determine the FUTA tax owed, employers in credit reduction states must follow these steps:
- Complete Form 940, including Schedule A (if applicable).
- Enter wages that are subject to the unemployment tax laws of a credit reduction state.
- Calculate the additional FUTA tax due based on the state’s credit reduction percentage.
By understanding credit reductions and using the appropriate resources, employers can accurately calculate and report their FUTA tax obligations on Form 940 and Schedule A.
Multi-State Employment and Form 940
Reporting for Multi-State Employers
Multi-state employers are those who have employees working in more than one state. These employers need to ensure compliance with each state’s unemployment tax laws. Form 940, the Federal Unemployment Tax Act (FUTA) tax return, is a vital part of this process. Employers subject to FUTA regulations are required to report their FUTA tax liabilities, which contribute to state unemployment compensation funds.
When dealing with multi-state employment, it’s essential to be aware of credit reductions. Some states may have credit reductions in place, which can affect the amount of FUTA tax owed by a multi-state employer. By staying informed on each state’s unemployment tax laws and any adjustments, employers can proactively manage their FUTA tax obligations.
Schedule A (Form 940) Usage
In order to accurately report FUTA tax for multi-state employers, Schedule A (Form 940) is utilized. This specific schedule is designed to help employers calculate their annual FUTA tax for those states with credit reductions on wages subject to the respective state’s unemployment compensation laws. Employers should make sure to reference the current revision of Schedule A (Form 940) for any recent developments or updates.
To effectively use Schedule A (Form 940), multi-state employers must follow these steps:
- List all relevant states: Include all states where the employer has employees subject to state unemployment tax. For each state, provide the total taxable FUTA wages.
- Calculate credit reductions: For states with credit reductions, determine the applicable reduction rate and calculate the amount of additional FUTA tax owed for employees in that state.
- Total FUTA tax owed: Sum the calculated FUTA tax amounts for all states and incorporate this total into the main Form 940.
By following these guidelines and utilizing Schedule A (Form 940), multi-state employers can ensure accurate reporting of their FUTA tax liabilities and maintain compliance with both federal and state unemployment tax laws.
Common Adjustments and Exclusions
Adjustments to FUTA Tax
In certain cases, adjustments may be necessary to the FUTA tax reported on Form 940. Employers may be eligible for adjustments when they have made excess FUTA tax payments, paid state unemployment taxes late, or provided certain fringe benefits to employees.
For example, if an employer paid state unemployment tax late, the FUTA tax credit may be reduced, resulting in a higher net FUTA tax rate. On the other hand, if the employer discovers that excess FUTA tax was paid due to an error during the tax year, they can request a credit or refund on Form 940.
Payments Exempt from FUTA Tax
Not all employee payments are subject to FUTA tax. Some types of payments are exempt from FUTA tax, meaning they do not need to be reported on Form 940. A few common examples of exempt payments include:
- Fringe benefits: These are non-cash benefits offered to employees in addition to their regular compensation, such as health insurance, company cars, or retirement plan contributions. Fringe benefits are generally not subject to FUTA tax reporting.
- Certain types of employee reimbursements: Some reimbursements, such as qualified moving expense reimbursements, are not subject to FUTA tax due to the Tax Cuts and Jobs Act (P.L. 115-97).
- Qualified bicycle commuting reimbursements: The exclusion for qualified bicycle commuting reimbursements from an employee’s income as per section 132 is suspended, making them exempt from FUTA tax.
It is essential for employers to be aware of these common adjustments and exclusions when preparing their Form 940 for submission to the Internal Revenue Service. This helps ensure accurate FUTA tax reporting and reduces the likelihood of errors or penalties.
Completing and Submitting Form 940
Filling Out the Form
To complete Form 940, employers need to gather relevant information such as their Employer Identification Number (EIN), the total amount of wages paid, and any taxable FUTA wages. The form is generally divided into multiple parts, including:
- Determine your FUTA tax liability
- Calculate your adjustments
- Determine your total FUTA tax due for the year
- Determine any potential credits
- Calculate the final amount due or refund expected
It is essential to accurately report your information and follow the instructions provided by the IRS in order to avoid potential penalties or inaccuracies in your filed form.
E-Filing vs Mailing
Employers have two options when it comes to submitting Form 940: e-filing or mailing. Each method has its benefits, and employers should choose the one that best suits their needs.
E-filing:
Filing Form 940 electronically allows for quick submission to the IRS, reduces the risk of errors, and provides a confirmation receipt. Employers can file electronically using the Modernized e-File (MeF) system through an authorized e-file provider or tax preparation software. The IRS website provides a list of authorized providers. To pay the FUTA taxes, employers can use the Electronic Federal Tax Payment System (EFTPS), which is a free, secure service provided by the Department of the Treasury.
Mailing:
If an employer prefers a more traditional approach, they can mail the completed Form 940 to the IRS. Before mailing, it is important to double-check the information on the form to avoid any errors. Mailing addresses for Form 940 submissions can vary based on your location and whether you are including a payment. Be sure to consult the IRS website to find the correct mailing address for your specific situation.
Regardless of the submission method chosen, the deadline to file Form 940 is January 31st of each year. It is important to submit the form and pay any associated FUTA taxes on time to avoid potential penalties or interest on late payments.
Resolving Issues and Amendments
Dealing with Penalties
It’s essential to be aware of the potential penalties associated with Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return. Employers may face penalties for late filing, late payment, or underpayment of taxes. Deadlines are crucial, as failure to meet them can result in increased fines. For instance, not filing Form 940 on time may result in a penalty of 5% of the unpaid tax, which can escalate by an additional 5% monthly, for a maximum of 25%.
In cases of underpayment, the Internal Revenue Service (IRS) may issue automatically generated notices, including information on the penalties detailed above. However, if an employer recognizes a mistake or a genuine reason for underpayment, it’s possible to resolve the issue with the IRS.
Amending Form 940
If an employer identifies a mistake on the previously filed Form 940, it’s crucial to amend the return promptly. Taxpayers use a Form 940 for correcting a previously filed return by checking the “Amended Return” box in the top right corner of the Form 940.
To give you a better understanding, here’s a brief overview:
- Review the original Form 940 to find the error.
- Obtain a new Form 940 for the same tax year as the original return.
- Check the “Amended” box at the top right corner of the new Form 940.
- Correct the errors in the new form.
- Complete Part 4 of the amended Form 940, providing an explanation of the changes.
- Sign and mail the amended form to the appropriate IRS address.
In general, refund claims must be filed within three years from the date the original return was filed, or two years from the date the tax was paid, whichever is later. Nevertheless, some exceptions may apply.
By dealing with penalties and amending Form 940 promptly, employers can ensure compliance with the IRS and maintain accurate records for their annual federal unemployment tax returns.
Additional Information for Employers
IRS Resources and Assistance
The Internal Revenue Service (IRS) provides valuable resources to assist employers in understanding their obligations related to Form 940. Employers can find comprehensive guidance on IRS Form 940 through the official website, which includes “Instructions for Form 940 (2023)” and information on the annual Federal Unemployment Tax Act (FUTA) tax return.
Small businesses can also seek assistance from professional accountants to ensure accurate and timely filing of Form 940. The IRS offers dedicated support for small businesses, including guidance on state unemployment taxes and other relevant topics.
Determining State Unemployment Taxes
Employers need to be aware of their responsibilities for state unemployment taxes in addition to federal unemployment taxes. State unemployment tax rates may vary, and it is crucial for employers to familiarize themselves with their respective state guidelines.
The following steps can help employers determine their state unemployment taxes:
- Visit the state’s labor or unemployment agency website: Each state has a designated agency responsible for managing unemployment insurance programs. Visiting the official agency website will provide accurate information on state unemployment tax rates and filing requirements.
- Understand state-specific requirements: Some states may have unique requirements for unemployment taxes, based on factors such as industry, number of employees, or experience rating. Make sure to review the state guidelines thoroughly.
- Consult a professional accountant: To ensure compliance with both federal and state regulations, it is recommended that employers consult a professional accountant who is knowledgeable about local tax laws and can provide tailored advice.
Employers must ensure they are accurately calculating and reporting both federal and state unemployment taxes to avoid penalties and maintain compliance. By utilizing the available resources and seeking professional guidance, employers can streamline the filing process and fulfill their tax obligations.
Frequently Asked Questions
What is the purpose of Form 940?
Form 940 is used by employers to report their annual Federal Unemployment Tax Act (FUTA) taxes. This tax is used to fund unemployment benefits for workers who lose their jobs. Employers must calculate the FUTA tax they owe and file Form 940 to report it to the Internal Revenue Service (IRS).
How do Form 940 and Form 941 differ?
While both forms are related to employment taxes, they serve different purposes. Form 940 is specifically for reporting the annual FUTA taxes that employers are required to pay. On the other hand, Form 941 is used to report employers’ quarterly federal tax withholdings for income, Social Security, and Medicare taxes.
When is the deadline to file Form 940 for 2023?
Form 940 for the 2023 tax year is due by January 31, 2024. However, if all FUTA tax payments were made on time and in full, the deadline extends to February 10, 2024. If January 31 falls on a weekend or holiday, the due date will be the next business day.
Is electronic filing available for Form 940?
Yes, employers have the option to e-file Form 940 through the IRS e-file system or a third-party tax preparation software, in addition to submitting a paper form. E-filing can be more convenient, as it provides a faster, more secure, and accurate method of submitting the form.
What are the specific instructions for completing Schedule A of Form 940?
Schedule A of Form 940 is used to report credit reduction information for states that have outstanding loans from the federal government for unemployment benefits. Employers should fill out Schedule A only if they have employees in a credit reduction state.
To complete Schedule A, employers need to list each credit reduction state where they had employees, the number of taxable wages for that state, and then multiply the taxable wages by the credit reduction rate to calculate the credit reduction amount. Finally, calculate the total credit reduction by summing all credit reduction amounts and enter this value on Form 940, line 11.
Where should Form 940 be mailed after completion?
The mailing address for Form 940 depends on the state where the employer is located and whether a payment is included with the form. The IRS provides a list of mailing addresses in the Form 940 instructions, which can be found on their website. If e-filing, no mailing is necessary as the form is submitted electronically.
