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Payroll taxes include federal income, Social Security, Medicare, unemployment, and state and local taxes. IRS Form 940 is the employer’s annual federal unemployment tax return, filed separately from the Form 941 employer’s quarterly tax returns.
However, payments for FUTA, federal income, Social Security, and Medicare taxes are usually deposited quarterly and have the same due dates.
Unlike other payroll taxes, unemployment taxes aren’t withheld from the employee’s wages, and paying them is solely the employer’s responsibility.
IRS Form 940 reports the amounts deposited for FUTA taxes. It allows employers to determine if they overpaid or underpaid unemployment tax for a particular tax year.
In this comprehensive guide for employers, you’ll find out if you must file IRS Form 940, and we’ll cover all the steps you must follow to complete it.
Table of Contents
Understanding FUTA Taxes
Companies with one or more employees must pay federal and state unemployment taxes. These funds finance job service programs, unemployment insurance, and unemployment compensation payments to assist workers who lose their jobs.
The FUTA tax rate is 6%, which applies to the first $7,000 of the employee’s wage (wage base). But this tax rate can be reduced by up to 5.4% if the employer also contributes to state unemployment programs.
Consequently, employers that deposit federal and state unemployment taxes can reduce the FUTA tax rate to just 0.6%. Even though the employee’s wage determines the FUTA amount, it isn’t withheld from the employee’s wage.
Instead, employers must set aside the funds to pay unemployment tax quarterly or annually for all their employees.
Still, not all wages are subject to FUTA tax, and employers don’t have to calculate this tax for wages paid to their parents, spouses, or children under 21.
The Purpose of IRS Form 940
The employer’s annual federal unemployment tax return reports the amounts a company deposited for unemployment tax on behalf of its employees.
The form doesn’t list the individual contributions for each employee. It sums up the total unemployment tax a company pays in a year. Form 940 is also used:
- To amend previously filed federal unemployment tax returns.
- To submit the company’s final federal unemployment tax return (after a business stops paying wages)
- To report unemployment tax, a successor employer deposited after taking ownership of a company.
- To indicate that an employer didn’t deposit FUTA taxes because no employee wages were paid.
Agents of home care service recipients and CPEOs must attach Schedule R (Form 940) to Form 940 when filing their annual unemployment tax return.
Multi-state employers that hire remote workers must file Form 940. However, their eligibility for the state unemployment tax credit will depend on which state funds the employee’s unemployment benefits.
IRS Form 940 Filing Requirements
The wages you pay to employees are subject to FUTA tax when either of the conditions below apply:
- A part-time or full-time employee works over twenty weeks for an employer during a calendar year. An employee doesn’t have to work twenty or more weeks consecutively. Businesses classified as partnerships cannot count partners as employees.
- An employee’s wage exceeds the $1,500 threshold during the calendar year.
Businesses that only employ independent contractors don’t have to file IRS Form 940 because they need to complete Form 1099-NEC.
In addition, agricultural employers must file Form 940 if they pay over $20,000 of cash wages to farmworkers or if they employ more than ten farmworkers for twenty or more weeks during a part of the day or the entire day.
On the other hand, household employers must report unemployment taxes on Schedule H (Form 1040) if they pay over $1,000 cash wage to an employee during any quarter of a calendar year.
Religious organizations, non-profits, and other tax-exempt organizations aren’t required to pay unemployment taxes or file Form 940. However, 501(c)(3) organizations are subject to FUTA tax when paying wages to employees of a different type of tax-exempt organization.
A Quick Guide Through Form 940
Even though Form 940 has only two pages, filling it out can be time-consuming. You’ll need your payroll records to determine the total wages you paid to employees and check if any payments you made are exempt from unemployment tax.
According to the IRS, a business spends approximately ten hours yearly on recordkeeping and gathering the documents necessary to complete the form.
IRS Form 940 is divided into seven parts, so let’s review each section and see how to complete it.
Part I
You must include the company’s EIN, trade name, and contact details at the top of the form. You should also indicate why you’re submitting the form. But if none of the lines in the Type of Return section applies to your situation, you should leave all checkboxes empty.
In the form’s first section, you should indicate if you pay unemployment taxes in one or more states and declare if you paid wages in a state subject to the credit reduction. Please note that you may have to attach Schedule A (Form 940) if lines 1b, or 2 apply to your situation.
Part II
This section collects information about the total wages an employer pays to employees, fringe benefits, retirement contributions, and other FUTA-exempt payments.
You’ll use this information to determine the total taxable FUTA wages and the FUTA tax before adjustments.
Part III
Instructions for Form 940 booklet contains a worksheet on page 11 that allows you to calculate the adjustment if some of the taxable FUTA wages were excluded from state unemployment tax.
You should multiply the total FUTA wages from Line 7 by 0.054 if all taxable FUTA wages were excluded from the state unemployment tax. Use the information from Schedule A (Form 940) to determine a credit reduction if applicable.
Part IV
The next step is to calculate the total FUTA tax after the adjustment. To do so, you must add values from Lines 8,9,10 and 11. Afterward, you must specify the FUTA tax amount you deposited during the year and calculate the balance due on Line 14.
You can deposit the balance due with Form 940 if the amount on Line 14 is under $500. Indicate the overpayment amount on Line 15.
Part V
You’ll only have to report your FUTA tax liability for each quarter if the total FUTA tax after adjustment is over $500. Please note that you shouldn’t enter the FUTA tax amount you deposited during each quarter in this section.
Parts VI and VII
Employers can enter the designee’s name, phone number, and PIN if they want to authorize a tax preparer or an employee to discuss the federal unemployment tax return with the IRS.
The business owner or authorized personnel such as principal officers or estate fiduciaries can sign and date the form in its last section.
Filing Deadline and Deposit Due Dates
The filing deadline for Form 940 is January 31 or the next workday if the date falls on a weekend or holiday. Employers who deposited FUTA taxes on time can send this form to the IRS by February 10.
You can e-file Form 940 with H&R Block or a similar tax software. Employers can also mail the form to the IRS, but the mailing address depends on where you live and whether the return includes the payment voucher (Form 940-V).
However, you should only include the payment voucher with this form if the FUTA tax for the fourth quarter is under $500. You must use the Electronic Federal Tax Payment System to make quarterly deposits or pay overdue unemployment tax over $500.
FUTA taxes are due on the same day as other payroll tax deposits, except fourth-quarter deposits, and you must complete the payment for each quarter by April 30, July 31, October 31, and January 31.
Employers can carry over a FUTA tax deposit from one quarter to the next if the due amount for that quarter is under $500.
Frequently Asked Questions
The IRS will charge a 5% failure to file penalty if you don’t submit the form before the deadline. Moreover, you’ll have to pay a 10% of the deposit due penalty if your federal unemployment tax deposit is more than 15 days late.
Any business entity treated separately from its owner for tax purposes is classified as a disregarded entity. A disregarded entity must file Form 940 under its name and include its EIN on the document.
California, New York, Colorado, Illinois, Connecticut, and the Virgin Islands currently have the status of credit reduction states. Consequently, employers from these states must pay higher FUTA taxes than employers from other states.
The federal unemployment tax rate is fixed at 6%, while state unemployment tax rates range from 2% to 9.2% of an employee’s wage, and the wage base for 2023 is $25,700.
Reporting Your Unemployment Tax Obligations on IRS Form 940
It’s hard to overstate how important it is for employers to deposit FUTA taxes and file Form 940 on time.
Besides severe penalties, the IRS also charges interest on those penalties, so your tax liability will increase abruptly if your deposit or employer’s annual federal unemployment tax return is late.
Completing Form 940 is easy, but it can take a substantial chunk of your time if you don’t have a right record of the wages you pay to your employees.
Hence, the best way to stay compliant with your payroll tax obligations is to prepare and gather all the documents you need to report FUTA taxes before starting to work on this form.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
