The federal unemployment tax is one of the many payroll taxes employers are accountable for. The Federal Unemployment Tax Act (FUTA), with state unemployment systems, provides for payments of unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. If businesses have employees for a significant portion of the year, there is a high probability they will need to file IRS Form 940. Employers use this form to calculate their FUTA tax liability for the previous calendar year and determine how much federal unemployment tax they owe at the time the return is filed. Taking this into consideration, it’s important for employers to have a better understanding of Form 940, its content, how to file and when, as well as differences with Form 941.
When to Use Form 940
Employers are required to file Form 940 if either of the following is true:
- They paid wages of $1,500 or more to W-2 employees during any calendar quarter either during the current or previous year; or
- They had a W-2 employee work any amount of time for 20 or more weeks of the year. The 20 weeks do not have to be consecutive – This includes full-time, part-time and temporary employees.
At the same time, there are some exceptions to this rule:
- Non-profits, religious organizations, and other 501(c)(3) accredited firms are exempt from paying FUTA tax;
- Organizations like agricultural businesses have special rules they must follow regarding Form 940. For example, these businesses only need to file this form if they paid $20,000 in cash wages or employed 10 or more farmworkers for 20 weeks throughout the year.
- Independent contractors are responsible for paying their own benefits along with taxes and are not eligible for unemployment insurance, unlike their employee counterparts.
Form 940 is a 2-page form. In addition to providing some basic information about a business at the beginning of the form and a signature at the end, employers have seven more parts to complete.
After giving basic information, such as Employer Identification Number (EIN), business name, trade name and address, employers complete the following sections:
- Part One indicates whether employers paid unemployment tax in one state or multiple states and if any of the states are a credit reduction state;
- Part Two is used to calculate the total FUTA tax that employers owe. To do so, they need to provide total wages paid to all employees and wages paid in excess of $7,000 per employee;
- Part Three is used to calculate any adjustments to the FUTA tax. Employers need to report additional FUTA tax for credit reduction states as well as if they paid SUTA tax late;
- Part Four shows the total FUTA tax liability after adjustments and deposits paid throughout the year. This result includes the net balance due or net overpayment;
- Part Five shows the total FUTA tax liability for each quarter. This section of Form 940 is needed only if the total FUTA tax liability reported on line 12, Part Four, is more than $500. Otherwise, there is no need to complete it;
- Part Six is used to designate a third party to respond to possible IRS notices and provide any missing or corrected information.
Form 940 is due on January 31 every year. When January 31 falls on a weekend or holiday, employers can file the form on the next business day. If they file the form late, the penalty is typically 5% per month of the unpaid balance due.
While Form 940 is only due once per year, payments may be required throughout the year. Companies owing at least $500 per year in FUTA taxes must pay quarterly to avoid penalties. However, if they owe less than $500 in a quarter, the amount owed can be carried forward until they owe at least $500.
To file and make a payment online, employers can use the IRS Electronic Funds Withdrawal (EFW) system. If they mail the paper form, the IRS address they use depends on where they are located and whether they are including a payment with the form. Given that filing addresses change from time to time, it is necessary to check the IRS web page before mailing Form 940.
Form 940 and 941
To understand what is form 940 and use it properly, employers should differentiate between this form and Form 941. Both forms are required by the IRS to report employer payroll taxes, but they are used for different types of taxes.
While Form 940 is used by employers to file annual federal unemployment taxes, Form 941 is used to report quarterly payroll taxes including Medicare, Social Security, and Federal Income Tax. When submitting Form 941, employers also send in the employee withholdings along with the employer contribution.
In addition to this, Form 941 is required four times per year, while 940 is only sent once per year. Also, Form 941 is usually due by the last day of the month following the end of a calendar quarter. Forms and payments are sent in by the end of January, April, July, and October.
Effective Handling of Payroll Taxes
While payroll tax calculations and filings are complex, they are not optional for businesses with employees. Also, paying unemployment taxes and reporting them can be fairly straightforward, but employers must have a good understanding of required forms and how state and federal payments work together.
It is critical for every employer to always submit accurate forms and make payments by the due dates, or they risk facing penalties and interest among other legal challenges. To ensure effective handling of this time-consuming and confusing task, employers can automate payroll tax management. As a result, Form 940 and any related state form are accurately filed while remaining compliant with all requirements.
Reap the benefits of automated payroll tax processing and ensure compliance every step of the way, from payroll deductions and withholdings to form submission and payment to the IRS and any required state authorities.