IRS Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return

What is IRS Form 940? A Deep Dive into the FUTA Tax Return

Okay, let’s talk about something that might sound a little complicated but is actually pretty straightforward once you understand it: IRS Form 940, also known as the Employer’s Annual Federal Unemployment (FUTA) Tax Return. Think of it as the government’s way of making sure there’s a safety net for people who lose their jobs.

What is FUTA and why does it matter?

First things first, let’s decode FUTA. FUTA stands for Federal Unemployment Tax Act. It’s a federal law that requires employers to pay a tax that goes towards funding unemployment compensation programs for those who are out of work. It’s like an insurance policy for workers, funded by businesses. It’s not something taken from an employee’s paycheck.

Who Needs to File IRS Form 940?

Not every employer has to file Form 940. Here’s the general rule: You’ll likely need to file Form 940 if you answered yes to either of these questions:

• Did you pay wages of $1,500 or more in any calendar quarter during the year?
• Did you have at least one employee for at least some portion of a day in 20 or more different weeks during the year? This can be during any quarter.

If either one of these is true, then get ready to file Form 940! There may be exemptions depending on if you made payments to specific individuals.

How Does Form 940 Work?

Form 940 essentially calculates how much you, as an employer, owe in FUTA tax for the year. Let’s break it down step by step.

1. Calculating Your Total Wages: This is where you start. You need to add up all the wages you paid to your employees during the year. Some wages are not subject to FUTA, so it’s important to correctly identify those.
2. Determining your FUTA Taxable Wage Base: There is a taxable wage base limit for FUTA. For 2023, the limit was $7,000 per employee. This means you only pay FUTA tax on the first $7,000 you pay to each employee. The rest of what you pay is not subject to the tax.
3. Applying the FUTA Tax Rate: This is where the math happens. The tax rate is not set in stone and can fluctuate, but it is currently at 6.0%. You’ll multiply the first $7,000 of wages paid to each employee by this percentage. However, if you paid your state unemployment taxes on time, you could qualify for a credit of up to 5.4% and therefore only pay 0.6% in federal unemployment tax.
4. Calculating your FUTA Tax Liability: Here is where you can figure out what your total liability will be. Multiply the taxable wages by 0.06 or 0.006, depending on whether you qualify for the credit.
5. Filing and Paying: Once the tax liability is calculated, it must be paid.

When Do I Need to File and Pay?

The deadline for filing Form 940 is typically January 31st of the year following the tax year. However, if you made all your FUTA tax deposits on time, you have until February 10th. It’s always a good idea to check the IRS website for the most up-to-date deadlines, just in case.

As for payments, you’ll usually need to deposit your FUTA tax quarterly if it exceeds $500 for the year. The specific payment schedule depends on how much you owe. The IRS provides guidelines based on quarterly liability amounts.

What happens if I don’t file or pay on time?

Failing to file Form 940 or pay on time can result in some penalties and interest on the amounts due. These penalties can add up fast, so it’s important to try and file and pay on time.

Key Things to Know About IRS Form 940

• It’s an Annual Tax Return: Unlike some other tax forms that might be quarterly, Form 940 is filed once a year.
• It’s Separate from State Unemployment Taxes: Don’t confuse this with your state unemployment taxes. FUTA is federal, and you’ll also have state unemployment taxes to pay.
• The Tax is on the Employer: Remember, FUTA is a tax paid by the employer, not the employee.
• It Helps the Unemployed: Your FUTA tax contributions directly support unemployment benefits, providing a crucial safety net for workers.
• **Use proper form: ** There are multiple versions of form 940, be sure to check the IRS website to ensure you are using the latest version.

Tips for Filing Form 940

1. Keep Accurate Records: Keeping clear and organized records of wages paid to employees throughout the year will help you complete the form accurately.
2. Double-Check Your Math: A simple mistake in your calculation can lead to penalties, so be sure to double-check your numbers.
3. Use the IRS Resources: The IRS website provides instructions and resources for completing Form 940. Use them!
4. Consider Tax Software or a Tax Pro: If you’re feeling overwhelmed, consider using tax software or hiring a tax professional to handle the filing for you.

Common Mistakes and Misconceptions

• Confusing FUTA with State Unemployment Taxes: Many people mistakenly believe the federal taxes cover the state taxes. This isn’t true, both are separate taxes that employers must pay.
• Assuming All Wages are Subject to FUTA: Remember that the FUTA tax only applies to the first $7,000 paid to each employee for a tax year.
• Missing the Deadlines: Failure to meet the deadlines can result in penalties, so always mark your calendar and pay on time.
• Forgetting about the Credit: Don’t forget that you could qualify for up to 5.4% credit against your FUTA tax liability. Be sure to properly calculate this to ensure you are not overpaying.

Related Terms to Understand

• State Unemployment Tax: This is similar to FUTA but is administered at the state level.
• Employer Identification Number (EIN): This is the unique tax ID assigned to employers by the IRS. You’ll need this to file Form 940.
• Taxable Wage Base: This is the maximum amount of wages you pay to an employee subject to FUTA tax.
• Unemployment Compensation: The benefits paid to those who have lost their jobs, funded by FUTA and state unemployment taxes.

In Conclusion

IRS Form 940, while it may seem like another daunting tax form, is ultimately a straightforward process. By understanding who needs to file, how the FUTA tax works, and what deadlines to meet, you can navigate this part of employer tax responsibilities with confidence. Remember to keep accurate records, double-check your work, and utilize resources available from the IRS. And if it all feels too much, don’t hesitate to seek professional help!