Table of contents
If you own or manage a business with employees, including just yourself, it’s essential to know about IRS Form 940. Form 940, also known as the employer’s annual Federal Unemployment Tax Act (FUTA), is required annually for most employers. Here’s a closer look at how the federal unemployment form works so you can make the best decisions for your business.
What is Form 940?
Form 940 reports a business’s annual Federal Unemployment Tax Act (FUTA) tax. These taxes, along with state unemployment tax systems, provide workers with a safety net if they lose their jobs and are eligible for unemployment insurance coverage. If you’ve ever heard someone say they are receiving unemployment, these taxes fund that benefit system.
State and federal unemployment taxes are paid by employers, not withheld from employee paychecks. Form 940 helps businesses (or, even better, their payroll providers) calculate what has been paid to employees and what the company owes in unemployment insurance taxes.
The form is relatively simple, but digging into the federal unemployment form instructions can lead you down a complicated rabbit hole with many rules and calculations to manage for an accurate filing.
Who Has to File Form 940?
According to the IRS, most businesses with employees have to pay unemployment taxes. If your business pays employees and files W-2 forms with the government, your business is likely included. The same form is required from sole proprietors to mega corporations with tens of thousands of workers. Keep in mind that some organizations, such as eligible nonprofits and some government entities, are exempt from this filing requirement and the related payment.
Companies that paid at least $1,500 in wages or had at least one employee (regardless of temporary, part-time, or full-time employment status) work part of a day in at least 20 different weeks of the year are required to file Form 940. The amount owed varies depending on the number of employees, wages paid, and other factors.
The standard FUTA tax rate is 6.0% on the first $7,000 in employee wages paid to each employee during the year. State unemployment tax rules vary by state. In general, businesses may receive a credit of up to 5.4% of FUTA taxable wages, lowering the rate to effectively 0.6% for paying state unemployment taxes. Take note that other factors, specific to each state, can reduce the amount of credit a company is eligible for in relation to this tax.
When Is the 940 Form Due?
The Form 940 due date is January 31 every year. Businesses can file the form until February 10 with no penalties, assuming they made all FUTA tax payments as required. When January 31 or February 10 fall on a weekend or legal holiday, you can file the next business day.
While Form 940 is required to be filed only once per year, payments due in relation to this tax may be required throughout the year. A company owing $500 or less can pay this tax annually along with the filing of the form. Companies owing amounts greater than $500 per year in FUTA taxes must pay as often as quarterly to avoid penalties. Another caveat of this payment requirement is that when you owe less than $500 in a quarter, the amount owed can be carried forward to consecutive quarters in the year until you owe at least $500.
Because these rules can be complicated, it often makes sense to work with a professional payroll provider who can handle calculations, payments, and forms so you don’t make any mistakes or miss critical due dates.
How to Pay FUTA taxes
You can mail or e-file Form 940. The IRS provides a list of where to mail forms and payments for each state.
If you’d rather e-file, you’ll need to do so through an IRS-approved software provider, and you’ll likely have to pay a fee. Or you can have a tax professional file the forms for you.
Guidelines for Multistate Employers
State unemployment tax rates and taxable wage limits differ from one state to another, so your tax liability will vary based on the state where your employees work.
So if you’re a multistate employer, you’ll need to register with the state workforce agency in each state where you have employees. You pay state unemployment taxes based on the actual work locations of employees, rather than where you or your headquarters are located.
In case you have a complex situation where an employee works in multiple states, refer to the Department of Labor’s Localization of Work provisions.
Form 940 versus Form 941
The IRS has so many forms that it’s easy to get them mixed up. Business owners may also encounter Form 941. It’s worth comparing Forms 940 and 941 so you know what each is used for.
Form 941 is the employer’s quarterly federal tax return, while Form 940 is the annual employer tax report. Form 941 is required four times per year for most employers, while the 940 is only sent once per year.
Form 941 includes reporting on federal income taxes, Social Security tax, and Medicare tax withheld from employee paychecks. When submitting, employers also send in payments for both the employee withholdings along with the related employer contribution for the quarter.
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. When the last day of the month falls on a weekend or a holiday, the payment and form are due on the next business day.
Getting Help With Your 940 Tax Form
Payroll tax calculations and filings are complex, and they’re not optional for businesses with employees. It’s critical to always submit accurate forms and make payments by the due dates. If you don’t, you risk a combination of penalties and interest, among other potential legal challenges.
Full-service payroll providers like Square Payroll take care of completing and submitting your Form 940 (and Form 941), so you don’t have to worry. When you use Square Payroll, the entire process is automated, from payroll deductions and withholdings to form submission and payment to the IRS and any required state authorities.
Payroll taxes and employee income taxes can be a major compliance headache, and proper preparation can take a significant amount of time and effort. Outsourcing that role to a trusted payroll provider can save you time and money while allowing you to focus your efforts on improving your business and growing the bottom line.
Don’t Miss a Payroll Form Due Date
You don’t need to be overwhelmed by payroll and business tax forms with the right partner. Whether you use Square Payroll or another payroll software to make your annual payroll a quick, simple, and automated process, you can simplify some of the headaches associated with filing tax forms. Integrations with other critical business applications, like banking and payment processing, have made cash flow management and tax filings more cohesive.
