Form 940 Explained – 2023 Updates
Form 940 Explained - 2023 Updates
Business owners who are responsible for paying federal unemployment taxes must report this information to the IRS every year. The IRS utilizes form 940 to calculate how much an employer owes in FUTA tax.
TABLE OF CONTENTS
Key Takeaways:
- The IRS tax form 940 is utilized by employers to report federal unemployment taxes to the IRS when they have W-2 employees working for them.
- The Federal Unemployment Tax Act (FUTA) tax is a type of tax employers are responsible for paying. This Federal Unemployment fund provides financial security for the employee in the case that they are laid off for reasons unrelated to their work performance because they can collect unemployment compensation.
- Employers are responsible for FUTA tax and must file form 940 if they have paid $1,500 or more to any W-2 employee OR if they have had at least 1 employee for 20 or more weeks during that tax year.
- Most employers who are responsible for paying the FUTA tax must also pay State Unemployment Tax Act (SUTA) tax. With the SUTA tax credit, employers can usually claim the SUTA tax paid as a credit off of their FUTA tax bill, often being able to claim the full tax reduction of 5.4% off of the 6% rate.
What Is IRS Tax Form 940?
The IRS tax form 940 is utilized by employers to report federal unemployment taxes to the IRS. Almost all employers are required to submit this annual form each year when they file their tax returns. The purpose of form 940 is to ensure that small businesses and the IRS are in agreement when it comes to the federal unemployment taxes that are owed.
In the United States, employers must pay for Federal Unemployment benefits for their employees. This Federal Unemployment fund provides financial security for the employee in the case that they are laid off for reasons unrelated to their work performance because they can collect unemployment compensation.
What Is FUTA Tax?
The Federal Unemployment Tax Act (FUTA) tax is an example of employer tax, meaning the employer is responsible for paying 100% of the FUTA tax liability. FUTA tax is calculated using a government-provided percentage of each employee’s wages. The standard FUTA tax rate for the past several years has been 6%, but sometimes employers are eligible for a FUTA tax reduction of up to 5.4% off of the initial 6% rate. FUTA fees are only owed on the first $7,000 earned by each employee.
Who Must Submit IRS Form 940?
A majority of employers in the United States are required to submit form 940 to the IRS, but not all.
Taxpayers are required to submit IRS form 940 if one of the following situations applies to them:
- They have paid above $1,500 in wages to a W-2 contracted employee (and not a contractor)
- They have paid one or more W-2 employees, either part-time or full-time, 20 or more weeks out of the past year.
There are a few exceptions to this rule as outlined by the U.S. Chamber of Commerce. The exemption states, “non-profits, religious organizations, and other 501(c)(3) accredited firms are exempt from paying this tax.” Businesses that work exclusively with contractors and do not have any W-2 employees are also exempt from FUTA tax liability.
How To File Form 940
The first step for filing form 940 is gathering all of the related financial and tax information needed to fill out the tax forms, including:
- Current FUTA Tax Rate: The FUTA tax rate has been 6% and the maximum credit reduction has been 5.4% for the past several years, but it is important to check, as this rate can change.
- Maximum FUTA Threshold: The 6% FUTA tax is only required on the first $7,000 each employee earns.
- Number of Employees: How many W-2 employees you had during that tax year will impact an employer’s FUTA tax liability.
- Total Earnings Paid: The total salaries or wages paid to each employee are required to calculate the corresponding FUTA taxes.
- State Unemployment (SUTA) Tax: If you paid SUTA tax during the tax year, this information will be utilized when filing form 940.
SUTA Tax Credit
Most employers who are responsible for paying FUTA tax are also responsible for paying state unemployment taxes. While it can seem overwhelming to factor in another unemployment tax when filing form 940, the good news is that employers can usually claim the SUTA tax paid as a credit off of their FUTA tax bill, often being able to claim the full tax reduction of 5.4% off of the 6% rate.
Eligibility and credit amounts for the SUTA tax credit vary greatly depending on which state the business operates in and what type of business it is. SUTA tax can be claimed on lines 1a and 1b on form 940.
Credit Reduction States
Credit reduction states are the states that have yet to repay the loans they have taken from the federal government within the time frame for repayment to meet the unemployment benefits liabilities.
Each year after November 10, the Department of Labor, the responsible party for the Federal Unemployment Trust Fund loan program, announces the list of credit reduction states. In 2022, the list was as follows:
- California
- Connecticut
- Illinois
- New York
- U.S. Virgin Islands
When To File Form 940
IRS Form 940 must be filed annually to keep up to date with taxes. For most of the small businesses that owe FUTA taxes, form 940 is due every year on January 31.
While form 940 is only required to be filed once a year, it is important that employers make quarterly tax payments if they owe more than $500 in FUTA tax for that quarter, or expect to owe $2000 for the whole year. If that quarterly $500 threshold is met, employers must submit payment for the full balance from that quarter. The deadlines for quarterly payments fall on the final day of the month following each quarter, so for the full year, the money would be due on the following dates: January 31, April 30, July 31, and October 31.
Employers can benefit from consulting with a tax professional when filing their taxes each year to ensure all aspects of their tax returns are correct. If you need help filling out form 940 or another employer tax form, contact us at Ideal Tax today for a free consultation!
