What Is Form 940?
Internal Revenue Service Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, is a document employers must file to pay and report on their federal unemployment taxes. The money from this tax goes toward the Federal Unemployment Trust Fund.
The amount of unemployment tax due is calculated and compared against the employer’s liability and the tax already paid using IRS Form 940. It factors in payments to all company employees minus any tax-exempt deductions, such as group term life insurance, dependent care benefits, and some fringe benefits. Multi-state businesses may also have to fill out Schedule A for Form 940 to calculate their credit reduction rate.
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How Federal Unemployment Taxes Work
The federal government uses payroll taxes paid under the Federal Unemployment Tax Act (FUTA) to distribute unemployment benefits to those facing job loss. Some payroll taxes are shared by the employer and employee, but these are paid only by employers and never withheld from an employee’s paycheck. If an employer owes unemployment taxes, they must pay the IRS.
Employers Required to Pay FUTA Taxes
Employers who've paid at least $1,500 in wages in any quarter of the tax year, or who have at least one part-time, full-time, or temporary employee working at least 20 weeks of the tax year, must pay FUTA taxes. There are two exceptions to this rule:
- You’ll owe the tax if you employ private household workers to whom you've paid $1,000 or more in cash wages.
- You must pay the tax if you employ 10 or more farmworkers for any part of the day for at least 20 weeks of the tax year.
- You also need to pay if you compensated your farmworkers $20,000 or more in cash wages during any calendar quarter of the year.
Employers with temporary farmworkers under H-2A visas will count their wages as part of the total cash wages paid, but they're not subject to FUTA taxes.
How to Know If You Qualify for an Exemption
Generally, you're exempt from FUTA taxes if you're a 501(c)(3) organization, state or local government employer, or tribal government employer who's participated in a state unemployment system the entire tax year. Wages of workers providing services under H-2A, F-1, J-1, M-1, or Q-1 visas may also qualify for exemption.
What Is the FUTA Tax Rate?
The current FUTA tax rate is 6% of the first $7,000 paid to each employee or a maximum of $420 per employee. However, your FUTA taxes may be eligible for up to a 5.4% credit in states where you’re also required to contribute state unemployment (SUTA) taxes. This leaves you with a net FUTA tax rate of only 0.6%.
Breaking Down the FUTA Credit Reduction
States without sufficient funds to pay unemployment insurance (UI) benefits to eligible workers who've lost their jobs can take a loan from the Federal Unemployment Trust Fund to make up the difference. If you've paid wages in a state that hasn't repaid its loan by November 10th of the tax year, you may be subject to a FUTA tax credit reduction. This means you won't receive the full 5.4% tax credit rate until the state repays the loan.
The Unemployment Trust Fund loan program is run by the US Department of Labor.
This agency also publishes a yearly list of credit reduction states once the repayment deadline has passed. For 2023, four states and one US territory have made the list:
- New York
- Virgin Islands
If your state isn’t a credit reduction state, you're entitled to the maximum 5.4% FUTA tax credit.
Who Needs to File Form 940?
What a 940 form does is allow employers to report how much they owe for this payroll tax. Most employers who've paid wages to employees in any current or previous year calendar quarter must pay unemployment taxes using this form. This includes S-Corp owners' income in exchange for business services.
According to the IRS, you must file a Form 940 if either of the following apply:
- Any employee worked 20 different weeks or more during the tax year.
- You paid $1,500 or more in wages to your employees within any calendar quarter during the tax year.
- You normally have employees but didn’t pay them during a specific calendar year.
How Often Do I Need to File Form 940?
The information within Form 940 is used to calculate your annual federal unemployment tax obligation. Therefore, you only need to file it once per year.
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How to Complete Form 940
An employer can learn how to fill out Form 940 in six simple steps:
- Enter your EIN, name, business name, and address. If you’re a sole proprietor, enter your name on the Name line and your legal business name on the Trade Name line. Don’t enter a trade name if you do business under your real name.
- Specify the type of return. Check the appropriate box if you’re filing an amended or successor employer return, made no payments to employees during the tax year, or are filing a final return for a closed business no longer paying employees.
- Indicate where you've paid unemployment taxes. This includes whether you've paid unemployment tax in one state, multiple states, or credit reduction states.
- Calculate your tax obligation. This form walks you through how to calculate FUTA taxes, taking total employee payments and tax-exempt payments into account.
- Factor in any required adjustments. This includes credit reductions from Schedule A.
- Determine whether you owe a balance or are entitled to a refund for overpayment. If you owe a balance, pay it according to the instructions (the 940-V Payment Voucher is included). If you overpaid in a previous year, you can request a refund or have it applied to next year’s return.
How to File Form 940 and Pay Your Unemployment Taxes
The Form 940 mailing address for your jurisdiction is listed on the IRS website. Be sure to check the site before sending forms each year—mailing addresses for IRS Form 940 vary depending on business location and whether it includes payment. Employers can also e-file IRS Form 940 themselves or via an authorized IRS e-file provider.
While you file the form annually, you may need to make quarterly tax payments. If your tax is more than $500 for the year, you need to submit at least one quarterly payment. If it’s less in any quarter, simply carry over the balance and add it to the next quarter’s liability. Once it's gone over the $500 threshold, make a quarterly deposit. Quarterly FUTA deposits are due by the last day of the month after the end of that quarter.
For example, a quarterly tax liability of $700 for January through March must be made by April 30th. However, a quarterly tax liability of $400 for the same period would be carried over to the next quarter. Then, if the total liability for January through June exceeds $500, submit your payment by July 31st of that year.
If the total liability still doesn't add up to at least $500, keep carrying it over until you reach the minimum deposit amount or the annual deadline (whichever comes first).
Employers must deposit their payment via the Electronic Federal Tax Payment System (EFTPS). If your unemployment taxes total less than $500 for the year, you can just include it with your annual return by filling out the 940-V Payment Voucher included on the form.
When Is Form 940 Due?
Employers must file Form 940 by January 31st following the year wages were paid. For example, you must file the form by January 31st, 2024, for wages paid in 2023.
If January 31st falls on a Saturday, Sunday, or legal holiday, IRS Form 940 is due the next business day. Employers who've deposited all FUTA tax payments on time can take until February 10th to file.
How to Amend Form 940
Employers can amend an IRS Form 940 from a previous year by using that previous year’s form to file the amended return. For example, if you need to adjust a return you filed in 2022, you can file an amended return using the form from 2022. The steps to amend your return are included below:
- Until the ability to amend returns electronically is available from the IRS, you'll need to use a paper form to amend your return (even if it was originally filed electronically).
- On paper Form 940, check the amended return box under Type of Return.
- Update the form with the correct amounts.
- Sign the form.
- Include an explanation with your form about why you're amending the return.
- Even if you include a payment, send your amended form to the designated location using the address for mailing forms without a payment.
- Employers with amendments for an aggregate Form 940 should also attach a Schedule R.
When Does Schedule A Apply for Form 940?
Employers in multiple states and employers who paid wages in a credit reduction state should submit Schedule A for Form 940. The form requires employers to indicate each state in which they were required to pay state unemployment tax.
What Is the Difference Between a 940 and a 941 Form?
IRS Form 940 and Form 941 are used to report different types of payroll taxes but are both required by the IRS. Employers file Form 940 for annual federal unemployment taxes and Form 941 to report Medicare, Social Security, and federal income taxes.
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