Form 940

Form 940: A Comprehensive Guide for Employers

As an employer, navigating the complex world of tax forms and regulations can be daunting. One crucial document you'll encounter is Form 940, also known as the Employer's Annual Federal Unemployment (FUTA) Tax Return. This comprehensive guide will walk you through everything you need to know about Form 940, from its purpose to filing requirements and beyond.

What is Form 940?

Form 940 is a tax form used by employers to report their annual Federal Unemployment Tax Act (FUTA) tax. The FUTA tax is a federal payroll tax that funds unemployment benefits for workers who lose their jobs. It's important to note that this tax is paid by employers, not employees.

The Internal Revenue Service (IRS) requires most employers to file Form 940 annually. This form helps the government track unemployment tax payments and ensure that employers are contributing their fair share to the unemployment insurance system.

Who Needs to File Form 940?

Generally, you must file Form 940 if you meet either of the following criteria:

• You paid wages of $1,500 or more to employees in any calendar quarter during the current or previous year.
• 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. This includes full-time, part-time, and temporary employees.

However, there are some exceptions to this rule. For example, if you only have household employees or agricultural employees, different rules may apply. It's always best to consult with a tax professional or refer to the IRS guidelines if you're unsure about your filing requirements.

Understanding FUTA Tax

Before we delve deeper into Form 940, it's essential to understand the FUTA tax itself. The FUTA tax rate is 6% on the first $7,000 of wages paid to each employee during the year. This means the maximum FUTA tax an employer would pay for each employee is $420 per year ($7,000 x 6%).

However, most employers don't end up paying the full 6%. Many states have their own unemployment insurance programs, and employers who pay into these state programs can receive a credit of up to 5.4% against their FUTA tax. This effectively reduces the FUTA tax rate to 0.6% for most employers.

Key Information Required on Form 940

When filling out Form 940, you'll need to provide various pieces of information. Here's a breakdown of what you'll typically need:

• Employer Identification Number (EIN)
• Business name and address
• Total payments made to all employees
• Payments exempt from FUTA tax
• Total taxable FUTA wages
• FUTA tax before adjustments
• Adjustments for state unemployment taxes paid
• Total FUTA tax after adjustments
• FUTA tax deposited for the year
• Balance due or overpayment

It's crucial to have accurate payroll records and state unemployment tax information on hand when preparing Form 940.

Filing Deadlines for Form 940

Form 940 is generally due by January 31 of the year following the tax year. For example, for the 2024 tax year, Form 940 would be due by January 31, 2025. If you made timely deposits in full payment of your FUTA tax for the year, you have until February 10 to file your return.

It's important to note that even if you're not required to make any FUTA tax deposits, you still need to file Form 940 by the due date. Failure to file on time can result in penalties and interest.

How to File Form 940

There are several ways to file Form 940:

• E-file: This is the preferred method for most employers. You can e-file through the IRS e-file system or use approved commercial tax preparation software.
• Mail: You can also file a paper form by mail. The mailing address depends on your location and whether you're including a payment with your return.

Regardless of how you choose to file, make sure you keep a copy of your completed Form 940 for your records.

Common Mistakes to Avoid When Filing Form 940

Even experienced employers can make mistakes when filing Form 940. Here are some common errors to watch out for:

• Incorrect EIN: Double-check your Employer Identification Number before submitting.
• Math errors: Carefully review all calculations, especially when determining taxable wages and tax due.
• Missing signatures: Ensure the form is signed and dated before submission.
• Late filing: Mark your calendar and file on time to avoid penalties.
• Incorrect state unemployment tax credits: Make sure you accurately report state unemployment taxes paid to claim the appropriate credit.

Taking the time to review your form thoroughly before submission can save you headaches down the road.

FUTA Tax Deposits

In addition to filing Form 940 annually, employers may need to make FUTA tax deposits throughout the year. The frequency of these deposits depends on the amount of FUTA tax owed:

• If your FUTA tax liability is $500 or less for the quarter, carry it forward to the next quarter.
• If your FUTA tax liability exceeds $500 for the quarter, you must deposit the tax by the last day of the month following the end of the quarter.

These deposits are typically made through the Electronic Federal Tax Payment System (EFTPS).

Form 940 vs. Form 941: Understanding the Difference

It's common for employers to confuse Form 940 with Form 941. While both are payroll tax forms, they serve different purposes:

• Form 940 is filed annually and reports FUTA tax.
• Form 941 is filed quarterly and reports federal income tax withheld, and Social Security and Medicare taxes for employees.

Most employers need to file both forms, but it's important to understand their distinct purposes and filing requirements.

Special Considerations for Form 940

There are a few special situations that may affect how you file Form 940:

1. Multi-State Employers

If you have employees in more than one state, you'll need to complete Schedule A (Form 940). This schedule helps you calculate the credit reduction for FUTA tax in credit reduction states.

2. Successor Employers

If you acquired a business during the year, you may be able to count the wages paid by the previous owner towards the $7,000 FUTA wage base. Special rules apply in these situations.

3. Household Employers

If you employ household workers, you may be able to report FUTA tax on Schedule H of your personal tax return (Form 1040) instead of filing Form 940.

The Importance of Accurate Record Keeping

Maintaining accurate payroll records is crucial for properly filing Form 940. You should keep detailed records of:

• Employee wages and compensation
• State unemployment tax payments
• FUTA tax deposits
• Previous years' Form 940 filings

Good record keeping not only makes filing Form 940 easier but also helps you in case of an IRS audit.

Changes to Form 940 for 2024

The IRS occasionally updates tax forms, including Form 940. While major changes are rare, it's important to review the most current form and instructions each year to ensure compliance with any new requirements or adjustments.

As of 2024, there have been no significant changes to Form 940, but always check the IRS website for the most up-to-date information.

Seeking Professional Help

While many employers can handle Form 940 on their own, some may benefit from professional assistance. Consider seeking help from a tax professional or payroll service provider if:

• You're new to employing workers and unfamiliar with tax requirements
• You have a complex payroll situation (e.g., multi-state employees, frequent turnover)
• You're unsure about your FUTA tax obligations
• You want to ensure compliance and minimize errors

A qualified professional can help you navigate the complexities of Form 940 and ensure you're meeting all your tax obligations.

Conclusion

Form 940 is an essential part of an employer's tax responsibilities. By understanding its purpose, filing requirements, and key components, you can ensure compliance with FUTA tax obligations and contribute to the unemployment insurance system that supports workers during times of need.

Remember, staying informed about tax requirements and maintaining accurate records are key to successful Form 940 filing. Whether you handle your taxes in-house or seek professional assistance, taking the time to understand Form 940 will help you fulfill your obligations as an employer and avoid potential issues with the IRS.

As with all tax matters, it's always best to consult with a qualified tax professional for advice tailored to your specific situation. By staying proactive and informed about Form 940 and other tax requirements, you can focus on what matters most – running your business and supporting your employees.