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Square cannot provide advice on tax issues. This article is for educational purposes and does not constitute legal or tax advice. For specific advice applicable to your business, please contact a professional.
If you own or manage a business with employees, including just yourself, it’s essential to know about IRS Form 940. Form 940 is also known as the Employer’s Annual Federal Unemployment (FUTA) Tax Return and is required annually for most employers. Here’s a closer look at how the 940 tax 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.
Most employers pay state and federal unemployment taxes, which are paid by employers and 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.
IRS Form 940 is relatively simple, but digging into the Form 940 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 solo self-employed business owners to mega-corporations with tens of thousands of workers.
Companies that paid at least $1,500 in wages or had at least one employee work part of a day in at least 20 different weeks of the year are required to file the form. 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. 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.
When is the 940 Form Due?
Form 940 is due on 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 the form 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, when you owe less than $500 in a quarter, the amount owed can be carried forward 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.
Form 940 vs. 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 looking at Form 940 vs. 941 so you know what each is 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, while 940 is only sent once per year.
Form 941 includes reporting income taxes, Social Security tax, and Medicare tax withheld from employee paychecks. When submitting, employers also send in the employee withholdings along with the employer contribution.
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. You get one more day when the last day of the month is a weekend or holiday.
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, or you’ll risk penalties and interest, among other legal challenges.
Full-service payroll providers like Square Payroll take care of the entire process 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 more than 12 hours, according to the IRS Instructions for Form 940. 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.