Instructions for Filing Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return

Form 940 Filing Instructions

What Is Form 940?

This is a tax form that allows employers to report their employment tax to the Federal Unemployment Tax Act (FUTA). FUTA tax is aimed at funding unemployment compensation to employees who have lost their occupation. The form usually indicates the amount of federal unemployment tax the employer is supposed to pay for the previous year, the amount paid and due. 

FUTA tax differs from other tax variations as the tax cannot be held back from the employee’s salary. The employer is liable for the payment of the taxes. Some business owners usually contradict the form with SUTA (State Unemployment Tax Act). They have identical roles of compensating workers who have lost their jobs but FUTA is on a federal level while SUTA serves on a state level. 

In this article, we will articulate more on what is form 940, who needs to file it, how to fill the form, among other imperative entities. You can compare the best tax relief companies which is an essential step in analyzing and choosing the tax relief provider that will align with your personal needs. 

Who Should File Form 940?

After understanding what is 940, let us discuss who is required to file 940. Every year, a business with several employees is supposed to report their unemployment tax through Form 940. To obtain the form, employers are required to visit the Taxes menu and select Payroll Tax and look for Employers Annual Federal Unemployment Tax Return and click 940. 

This applies to a business that pays more than $1,500 or more to employees in any calendar quarter which is accountable for the previous or the current year. It also requires employers to pay a percentage of their employees’ wages for $7,000 taxable wages of the year. In addition, if you have more than one employee who works for at least 20 weeks, you are liable for payment of FUTA taxes. 

However, there are some special rules for paying FUTA taxes to some types of businesses. They include

  • People with household workers such as maids. This applies if they paid more than $1,000 or more in any quarter.
  • Agricultural employers who paid $20,000 or more during any calendar quarter. Employers who had 10 or more workers on the farm are also mandated to pay for the taxes.
  • Family-owned businesses have distinct rules of paying FUTA taxes. Wages for children under 21 are not included. Spouses and other older family business partners’ wages should be incorporated in the tax payment. 
  • Educational, religious, and charitable organizations do not pay FUTA taxes nor file Form 940. 

When Is Form 940 Due?

Form 940 due date differs from the deadline of paying unemployment taxes. January 31 is the deadline for most businesses to file Form 940. It can also be executed the next business day in case January 31st is a weekend or holiday. You might note that the frequency of paying FUTA taxes depends on the number of employees one has which also projects on the amount you will pay. 

Employers who owe $500 or less of FUTA taxes can file Form 940 while paying the taxes. On the other hand, businesses that have more than $500 unpaid taxes are required to make payments on a quarterly scheme. If in a certain quarter your tax was $500 or below, you are required to roll it over to the upcoming quarter. The rolling over should be done until the tax is more than $500. After attaining the required threshold, deposit the tax based on the following due dates:

If Cumulative Tax Is More Than $500 on Deposit Your Taxes By
March 31 April 30
June 30 July 31
Sept 30 Oct 31
Dec 31 Jan 31

 

It is recommended that you mark your calendars which will alert you and keep you organized on filing the form. However, the IRS may be patient for late filing which requires submission of an extension. The extension has a limit of 6 months and should be in writing disseminating the reason for the extension and a signature by the employer. It should also be decently addressed to an IRS officer. 

There are penalties that accompany violating instructions for 940. A 5% penalty on the tax due will be imposed for failure to file Form 940. Late deposits or not making a deposit at all is subject to a penalty between 2% to 15% of the tax amount due.

Where To File Form 940

Filing of Form 940 is conducted through the IRS. If you choose to file on paper, you must send it to the address listed in the instructions of 940. These addresses vary based on the employer’s location and whether the form comes along with the payment. In addition, the address is prone to change yearly, which requires verification before mailing. 

In case of any burning issue concerning the payment of unemployment tax, you can consult a tax advisor, payroll service, or professional employer organization (PEO). They help in simplifying and automating tax filing which ensures that you are on the right side of the law. 

Can I File Form 940 Electronically?

Payment of unemployment taxes can be executed via the Electronic Federal Tax Payment System (EFTPS). The IRS recommends that people file electronically as it enables you to complete filing your Form 940 correctly and track your tax payments. In addition, you will receive acknowledgment within 24 hours. It has a small fee as it involves buying IRS-approved software that enables you to complete and submit the form electronically to the agency. 

Conversely, you can deploy an Authorized IRS e-file Provider Locator Service who sources out a tax professional to submit the form for you. 

How to File Form 940

The IRS Form 940 has seven sections. These parts are elementary with some math that may help you sync up your state and federal unemployment tax payments. Below is a discussion of the steps followed and how to file Form 940:

Top Section

Here, you will disseminate information regarding your business name, address, and employer identification number. 

Part 1

States whether your employees operate in one or multiple states. Also, indicate whether wages were paid in a credit reduction state. Question 1a has the state’s postal abbreviation for employers with workers in one state.

  • Multi-State Employees

Employers with workers in different states are liable to SUTA taxes in those states. Multi-state employers should fill out Schedule A (Form 940) which is under question 1b in part 1.

If you have workers living in a particular state but working in another, follow the Department of Labor’s multi-state employer test. This may help in determining which state’s SUTA taxes to pay. 

  • The Credit Reduction States

These refer to states that have borrowed funds from the federal government to support unemployment compensation but have not completed paying back. In this case, you may pay up to a 6% FUTA tax rate on the first $7,000 in wages per employee rather than the normal 0.6%. Check the box under question 2 of part 1. Fill out Schedule A (Form 940).

The good thing about credit reduction is that small businesses should not worry much. For instance, in 2018, the only state that had credit reduction was the U.S Virgin Islands. It has a 2.4% credit reduction. 

Part 2

This section is for computing your total FUTA tax amount. You commence by computing your annual payroll amount. Then eliminate wages paid over $7,000 for every worker. Other benefits such as fringe, retirement, life insurance payments, among others, should be excluded. The total FUTA tax amount is then calculated by excluding wages above $7,000, and other exempt wages and multiplying by 0.6%. 

Part 3

This part indicates any adjustments in your FUTA tax liability after paying the state unemployment taxes. Late payments and if wages paid to employees were free from state unemployment taxes, you will be subjected to a higher portion of FUTA taxes. You will complete the worksheet in Form’s Instructions to have a precise gauge on the adjustments to make. It is aimed at inhibiting employers from getting a windfall especially if they are located in states which levy lower unemployment taxes. 

Keep in mind that employers in a credit reduction state will be subjected to higher FUTA taxes. You should enter the total from Schedule A onto line 11 of Form 940. 

Part 4

In this section you compute your total FUTA tax liability in line 12, the outstanding balance in line 14 and line 13 entails the tax deposited for the year. If the balance in line 14 after making deposits is $500 or below, you can file Form 940 as you pay the tax. But if the balance after the deposits is above $500, the tax will be deposited separately. Overpaid taxes may be recovered by indicating on line 15. 

Part 5

When the annual FUTA tax amount owed is greater than $500, the balance should be broken in the quarter. Totals on line 17 when every quarter is added together must align with the total tax liability on line 12.

Part 6

This section allows you to authorize your accountant, employee, or any other third party to participate in the filing with the IRS. 

Part 7

It is a signature part that may also require the signature of a tax preparer if they were involved in completing the form. People who find any complications when filing Form 940 should consult a tax professional. 

Related Tax Forms

Form 941 (Employer’s Quarterly Federal Tax Return)

  • It is used by employers to report Federal Income Tax from their worker’s compensation and also the Social Security tax and Medicare tax. 
  • Form 941 filing deadline is April 30th (First quarter), August 2nd (Second quarter), November 1st (Third quarter), and January 31st (Fourth quarter).
  • There is no extension for Form 941 as witnessed in Form 940. 
  • If Form 941 is filed late, there is a 5% penalty that is assessed every month or partial month.
  • Late deposits are accompanied by a penalty of between 2% to 15% of the tax due. 
  • The IRS also imposes a 0.5% tax for every month or partial month for late tax payments. 

Form 943 (Employer’s Annual Federal Tax Return for Agricultural Employees)

  • is meant for employers that paid wages to farm employees. This is if the wages were subject to Federal Income Tax Withholding, Social Security, and Medicare taxes. 
  • Form 943 can substitute or be used as an addition to Form 941 if both regular and agricultural employees received payments during the year. 
  • In 2021, the filing deadline was February 1st. There was an additional 10 days to file if all tax deposits were up to date.
  • There is no extension for Form 943 by the IRS. 
  • Late filing is accompanied by a penalty that will be assessed. 
  • There is a penalty between 2% to 15% for businesses that don’t file Form 943 on the stipulated date. 

Form 944 (Employer’s Annual Federal Tax Return)

  • This one is designated for small businesses with a payroll tax liability that includes social security, Medicare, and federal income taxes. This is for less than $1,000 annually.
  • It is a rare form that normally does not apply to most businesses. 
  • Businesses that are harbored in this form will file and pay taxes once a year as compared to quarterly. 
  • There is no extension for Form 944. 
  • Penalties for violation resemble ones in 943 and 944.
  • People with an annual tax liability of below $2500, can pay the tax by filling this form. 
  • Late payments are accompanied by penalties of between 2% to 15%. 

Bottom Line

This article has conveyed all you need to know about Form 940 and the instructions for filling out Form 940. This is recommended to employers subjected to FUTA tax payments to have a seamless experience when filing and making payments. We have also discussed violations for not paying the taxes, related tax forms, how to fill Form 940, due dates, where and how to fill the form. 

Disclaimer

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Form 940 FAQs

What is the 940 tax form used for?

Do I need to file form 940?

Can I file the 940 electronically?

How do I avoid penalties for my business?

What should I do if I have employees in multiple states?