Depending on your source of income and filing status, you are subject to filing different tax forms and keeping track of various expenses. Employers or small business owners must file some additional forms. Form 940 is one of these, which is used for FUTA returns.
If you hire employees for your company, you must know what Form 940 is and why it works. But in case you do not, we are here to guide you.
Form 940 is the federal unemployment tax annual report that employers must file to inform the IRS about unemployment tax for their employees.
This unemployment tax is not deducted from the salary or payment for the employee. Instead, it is set aside by the employer to report on Form 940.
The Federal Unemployment Tax Act (FUTA) works alongside the state unemployment benefits to cover those who lost their jobs due to unforeseen circumstances.
Employers are taxed by the government to provide for these benefits. To abide by FUTA, employers need to make regular tax payments and report them on Form 940 with the IRS.
This payroll tax is charged from employers at 0.6% of the first $7,000 that the employee earns. Any income beyond this amount is not taxed. Depending on the state’s individual FUTA tax credit, this amount might turn out to be lower than 0.6%.
Form 940 is crucial to be filled by employers as this sum is not withheld from the employee’s paycheck. However, to do so accurately, you must be aware of the rules regarding this act and to whom it applies.
The IRS has very simple rules about who has to fill out Form 940. You must make FUTA payments if:
- You have employees to whom you have paid wages that amount to $1,500 or more during the financial year.
- You have had at least one employee for part of a day or more in any 20 or more different weeks over the year. This may include full-time, part-time, and temporary employees. They count even if their work duration is less than one business day.
After you have understood what a 940 tax form is and who is required to fill it, you need to know the due date. Note that FUTA payments are due quarterly, whereas Form 940 should be submitted once a year.
The due date for Form 940 for the year 2020 was February 1, 2021. But the IRS extends the deadline for those who have made FUTA payments regularly by 10 days. Hence, the due date for such employers will be February 10, 2021.
Form 940 is a simple enough form that has two pages and is divided into seven parts. It is fairly easy to fill out once you have clarity about the seven sections. Let’s go through their basics.
The first part covers information about your business that is important for the IRS. You have to mention how many states you pay unemployment taxes in.
- In Line 1, you must specify if you pay unemployment taxes in a single state.
- Line 1b is for those employers who pay taxes in more than one state.
- In Line 2, you need to specify whether you work in a credit reduction state.
- If you are a multi-state employer or work in a credit reduction state (i.e., you have checked the boxes in Line 1b or 2), you have to complete Schedule A of Form 940.
In Part 2, you will need to calculate your FUTA tax liability.
- Line 3 requires you to mention all payments that you made to your employees.
- In Line 4, you must mention if any of these payments are exempt from FUTA. Some FUTA-exempt payments may include group term life insurance and fringe benefits.
- In Lines 6-8, you calculate your total taxable FUTA payments and the total FUTA tax amount before adjustments.
This section requires you to make adjustments to the amount based on your state’s unemployment tax rules.
If all your FUTA wages mentioned in Part 2 are excluded from the state unemployment tax, you will need to:
- Multiply Line 7 by 0.054, and
- Record that amount in Line 9
Then, you can move on to Part 4.
If that is not the case, you can use the worksheet given on Page 11 of the instruction booklet to calculate your adjustments and the total amount dedicated to them.
In this part, you must calculate the total FUTA tax.
- Line 12 lets you add Lines 8, 9, 10, and 11 to calculate the total FUTA tax after adjustments.
- In Line 13, you can mention any FUTA payments or overpayments that you have already made.
- In Lines 14 and 15, you can determine whether there is any outstanding amount of FUTA tax or overpaid fees due for your business.
This section depends on the amount you calculated in Line 12.
- If that amount is more than $500, you must use boxes 16a-d to report FUTA liabilities for every quarter. Add the liability to the box, not the quarterly payment amount.
- Ensure the sum of all your entries in this step is the amount you entered in Line 12.
In this part, you have to designate someone to discuss Form 940 on your behalf with the IRS. This person can be an employee, a tax professional, or someone similar who is qualified for the discussion.
After entering all the details in the previous sections, you must sign your name in this part to complete the form.
If all your FUTA taxes are paid, you can skip this part. But if you have any tax amount due with the IRS, you must add a payment voucher along with Form 940.
To include a valid payment voucher, you must add your employer identification number (EIN), business name, and address, as well as the total payment amount. Once you mention all these details, your form and voucher are ready to be submitted.
There are multiple ways to file the 940 tax form. You can file a physical copy of the form with the IRS or choose to go with an electronic filing.
In case of paper returns, you must file Form 940 in the place indicated by the IRS. Depending on whether you also have a payment voucher to submit, you can consult this table to find the correct destination.
On the other hand, if you want to file this form electronically, you can go to the IRS website and carry out the process online.
The IRS gives you multiple ways to comply with FUTA and submit your payments and Form 940 on time to ensure the smooth running of your business. So, if you are an eligible employer who followed these steps, you can file the FUTA tax return well in advance.
Maintaining your account books is another step that ensures your returns are filed correctly and on time. Professional bookkeeping services like Fincent are perfect for creative small businesses looking for guidance on handling their books.