What Is Form 940 and How Is It Used? What You Need to Know
As a business owner, hiring an employee is always an exhilarating milestone. But with this exciting step comes new responsibilities. Managing taxes and compliance tops the list, and it can be one of the most daunting tasks you’ll face. Just when you think you’ve got a handle on things, you discover several tax forms that are necessary to keep your business compliant with the law.
To ease your struggles with the necessary tax forms, here's a guide on understanding the IRS Form 940, which is a crucial form employers use to report the FUTA taxes. We'll walk you through the basic details of the form, explain its importance, and show you how it’s used so that you can stay on top of your tax responsibilities with ease.
Main Takeaways From This Article:
- IRS Form 940 is an essential document for employers to report and pay Federal Unemployment (FUTA) tax annually.
- The form helps the IRS track each employer's contributions to the federal unemployment program, differentiating from Form 941, which covers payroll taxes.
- Employers must file Form 940 if they meet certain wage and employment criteria, with the annual submission deadline being January 31st.
- Accurate completion and timely submission of Form 940 is critical to avoid penalties, and you can find the tax form on the official IRS website.
- Platforms like Paystubsnow streamline filling out, organizing, and ensuring compliance with financial documents, making filing taxes simpler and more efficient.
What Is IRS Form 940?
IRS Form 940, also known as the Employer's Annual Federal Unemployment (FUTA) Tax Return, is a tax form that employers use to report and pay their FUTA tax. This tax helps fund unemployment compensation programs for workers who have lost their jobs.
What Is Form 940 Used for?
IRS Form 940 ensures the fulfillment of the employer's annual federal unemployment tax responsibilities and helps keep the unemployment benefits system running smoothly.
Even though states handle unemployment benefits for former employees, the federal government offers support through the Federal Unemployment Tax Act (FUTA). This system collects a federal unemployment tax to help states when they need extra funds to meet their benefits obligations.
What Is the Difference Between Form 940 and Form 941?
Understanding the differences between Form 940 and Form 941 is crucial for ensuring compliance with IRS regulations as an employer. While both forms are essential for reporting employment taxes, they cover different aspects of payroll taxes.
- Form 940: This form deals with the unemployment tax imposed on the first $7,000 of each employee's wages. Filing Form 940 is an annual requirement, meaning you only need to submit it once a year.
- Form 941: This tax formis filed quarterly and focuses on reporting federal income tax, Social Security tax, and Medicare tax withheld from your employees' paychecks. It also includes the employer's share of Social Security and Medicare taxes.
Form 940 is all about FUTA and helps support unemployment benefits, while Form 941 centers on payroll taxes, ensuring that federal income, Social Security, and Medicare taxes are precisely reported and paid every quarter.
Why Employers Must File Form 940 With the IRS
Employers need to file Form 940 with the IRS to report their annual FUTA payments. FUTA tax funds unemployment compensation for workers who have lost their jobs. By accurately paying and reporting FUTA taxes, employers comply with federal regulations, avoid penalties, and ensure their former employees can access unemployment benefits when needed.
So, it's not just about ticking a box—it's about supporting your employees and maintaining good standing with the IRS.
Who Needs to File Form 940?
So, as a business owner, you are probably wondering if you need to file Form 940. Here are the general guidelines for determining if you need to file Form 940:
- Paid Wages of $1,500 or More: If you paid wages of $1,500 or more to employees in any calendar quarter of the current or previous year.
- Employees for 20 Weeks: If you had one or more employees for at least some part of a day in any 20 or more different weeks in the current or previous year. These employees can be full-time, part-time, or temporary.
Special rules apply to certain types of employers:
- Household Employers: If you have household employees, like nannies or housekeepers, and you pay them wages, you might need to file Form 940. Specifically, if you paid at least $1,000 in cash wages during any calendar quarter this year or last year.
- Agricultural Employers: If you paid agriculture employers $20,000 or more in cash wages in any calendar quarter or had 10 or more workers on any given day for 20 different weeks in the current or previous year, you could also be on the hook for filing Form 940.
- Nonprofit and Governmental Employers: Generally, nonprofits and government entities are off the FUTA tax liability. But there are exceptions, so it's crucial to double-check the IRS guidelines to be sure you're covered.
If any of these apply to you, then yes, you need to file Form 940.
When Is Form 940 Due?
You'll need to file Form 940 by January 31st of the following year.
For example, for wages paid in 2024, the due date will be January 31, 2025.
However, if you’ve deposited all your FUTA taxes on time, you can take advantage of a 10-day extension, making the deadline February 10.
Mark these dates on your calendar and fill out your forms before the deadlines to avoid any penalties.
Where To Find Form 940
Employers can easily access Form 940 through multiple sources to ensure they meet their FUTA tax filing requirements.
- The most direct method is to visit the official IRS website, where you can download the form and the instructions to fill it out in PDF format.
- Many tax preparation software platforms include Form 940 in their offerings, facilitating electronic filing.
- Local IRS offices can also provide physical copies of the form if needed.
- Lastly, professional tax advisors or accounting firms can supply and help you with the form during tax consultations.
How To Fill Out and Submit Form 940 Step-By-Step
We are pretty sure you are one of the employers who need to file Form 940, so let's walk you through the process.
1. Gather Required Information
To start, you'll need to have a few key pieces of information at the ready:
- Your Employer Identification Number (EIN),
- Total wages paid to employees during the tax year,
- Amount of state unemployment tax paid,
- Details of any adjustments or credits, and
- Your business's contact information for accuracy and compliance.
If applicable, ensure you have the details of any credit reduction states. Having all this information at your fingertips will simplify the completion process and ensure you don't miss any critical details.
2. Complete the Employer Information Section
This section requires you to enter basic details about your business.
- Start by filling out your Employer Identification Number (EIN) accurately. This unique nine-digit number is crucial as it identifies your business entity.
- Next, input your business name and trade name (if any). It’s important to ensure these match with what’s registered with the IRS to avoid processing delays.
- Further, provide your business address. Include the street address, city, state, and ZIP code. This address should be your principal place of business. Double-check for any typos to ensure all communication reaches you promptly.
- By confirming these details, you’re making sure the IRS has the correct and up-to-date information about your company, which helps in smooth processing and communication.
3. Calculate Your FUTA Tax Before Adjustments
Calculating your FUTA tax before adjustments is simpler than it sounds.
Begin by identifying the total payments made to each employee during the calendar year. The FUTA tax applies to the first $7,000 of their wages. Therefore, if an employee earns more than $7,000, employers pay only $7,000 of their pay as FUTA tax liability.
The FUTA tax rate is 6.0%. So, for each employee earning up to the threshold, you would multiply their wages by 0.06. For instance, if you had three employees who each earned $10,000, you would calculate the federal unemployment tax on the first $7,000 of their wages as follows:
- Employee 1: $7,000 x 0.06 = $420
- Employee 2: $7,000 x 0.06 = $420
- Employee 3: $7,000 x 0.06 = $420
Add these amounts together to get your total FUTA tax before adjustments. In this scenario, the sum would be $420 + $420 + $420, resulting in a total of $1,260.
4. Determine Your Adjusted FUTA Tax
Estimating your adjusted FUTA tax involves making specific adjustments based on SUT rules. Here’s a simplified breakdown:
- Start With the Base Rate: The FUTA tax rate starts at 6.0% on the first $7,000 of each employee's annual wages.
- Apply State Unemployment Tax Act (SUTA) Credits: If you paid state unemployment taxes timely and in full, you could qualify for a credit of up to 5.4%. This would lower the effective FUTA tax rate to 0.6%.
- Check for Credit Reductions: For certain states that have not repaid federal borrowing, credit reductions may apply, requiring additional FUTA tax.
For example, California's credit reduction for the 2023 tax year results in an additional $42 per employee.
- Calculate the Adjusted Tax: Subtract any eligible SUTA credits from your base FUTA tax. For instance, if your effective FUTA rate is 0.6%, multiply it by the first $7,000 of each employee's wages. Adjust for any credit reductions.
- Finalize Adjusted Figures: Add any balance due from credit reductions to your adjusted FUTA tax for the final amount owed.
Make sure to include a payment voucher with Form 940 if FUTA taxes are due.
5. Assess Tax Liability and Balance
After determining your adjusted FUTA tax, it's vital to assess your tax liability and balance to ensure accuracy. First, report your total tax liability for each quarter of the year if it exceeds $500. This is crucial as it dictates whether deposits are required throughout the year or if payments can be made annually.
To assess the tax liability:
- Review the total taxable FUTA wages paid to each employee.
- Apply the FUTA tax rate (6%) to the first $7,000 of each employee's wages. Remember, any wages beyond $7,000 per employee are not subject to FUTA tax.
- Adjust your calculations if you are eligible for the state unemployment tax credit, which may reduce your effective FUTA tax rate to as low as 0.6%.
Once you've calculated your liability, the next step is to balance it. This involves checking for any discrepancies between your calculated liability and what has already been paid:
- If you owe additional FUTA tax, include the payment with Form 940. Use the payment voucher included in the form packet.
- If you've overpaid, indicate this on the form, and you can either apply the overpayment to future tax liabilities or request a refund.
Ensuring accurate reporting and balancing helps in maintaining compliance and avoiding potential fines or penalties. Always retain copies of all filed forms and payment receipts for your records.
6. Assign Third-Party Designee (Optional)
If you're electing to have someone else discuss your Form 940 with the IRS, you can assign a third-party designee. This person can be an employee, a paid tax preparer, or another individual you trust.
To assign a designee, you’ll need to complete Part 6 of the form. Here’s how:
- Locate Part 6 of Form 940.
- Enter the designee's full name.
- Provide a phone number where the designee can be reached during normal business hours.
- Create a five-digit Personal Identification Number (PIN) for the designee. This number will be used for verification purposes when the designee contacts the IRS.
- Ensure that the designee understands they can answer questions about Form 940 but cannot sign the form or otherwise take responsibility for it.
This step is completely optional, but having a third-party designee can be beneficial if you anticipate needing help with IRS communications about your FUTA tax liability.
7. Sign, Submit, and Retain Records
Once you've carefully filled out Form 940, the next important step is to sign it to make it official. A responsible person, such as the owner, partner, or corporate officer, must sign this form. If you used a third-party preparer, they must also sign it.
After signing, submit the form either by mailing it to the IRS or choosing electronic filing, which makes the process easier and reduces mistakes. Finally, keep copies of the completed form and all relevant documents like pay stubs and checks for at least four years. These records are important for any clarifications or audits, helping ensure your business stays secure and compliant.
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