Did you employ workers at your small business this year? If yes, you need to deal with employment taxes, like federal unemployment (“FUTA”) taxes. For each employee, you must pay a percentage of his or her wages for federal unemployment taxes, deposit the tax with the IRS, and report your tax liability on Form 940.
What Is Form 940?
Form 940 is the Employer’s Annual Federal Unemployment (“FUTA”) Tax Return. The FUTA tax, along with state unemployment taxes, provides funds for paying unemployment compensation to workers who have lost their jobs. While you do not withhold any money from an employee’s wages for FUTA tax, you use each employee’s wages to determine how much money you owe.
The standard FUTA rate is 6% on the first $7,000 paid to the employee. However, you can receive a credit of up to 5.4% for wages that are subject to state unemployment, meaning employers pay only 0.6% of the $7,000 paid to the employee or $42 maximum per employee. The state unemployment tax rate and wage base vary by state and is disclosed to the employer only by the state where it is registered.
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Who Needs to File Form 940?
An employer must file Form 940 if they paid wages of at least $1,500 to any employee during the standard calendar year. Businesses must also file Form 940 if they had any employee (temporary, part-time, or full-time) work anytime during 20 or more weeks. The 20 weeks do not need to be consecutive. There are also several exemptions for special circumstances (e.g., agricultural employees, foreign workers, Household employees, tax-exempt organizations).
When Does Form 940 Need to Be Filed?
Form 940 needs to be filed by January 31st of the following year unless that date falls on a weekend or government holiday, in which case the due date is moved to the next business day. However, if you’re up to date on all your FUTA payments, you can take an additional ten days to file.
The 2021 filing deadline is Monday, Jan. 31, 2022 (or by Feb. 10, 2022, if you’re up to date on all your FUTA payments).
When Do Form 940 Deposits Need to Be Made?
Even though Form 940 is filed once a year, an employer may have to make quarterly tax deposits. If the federal unemployment tax is more than $500 for the calendar year, at least one quarterly payment must be made. The deposit must be made by the last day of the month after the end of the calendar quarter (i.e., the quarterly deadlines are April 30, July 31, October 31, and January 31).
For example, if an employer’s federal unemployment tax totals $700 based on payroll for January through March, the tax must be deposited by April 30. If the quarterly liability is $500 or less in a quarter, it carries over to the next quarter. If liability for the first quarter of the year is $400, this carries over and is added to the liability in the second quarter to determine whether a payment is required. If quarterly payments are required, they must be deposited with the federal government using its free Electronic Federal Tax Payment System (EFTPS).
Where Does Form 940 Need to be Filed?
If you’re still filing form 940 by regular mail, please let TaxMe help you. TaxMe’s e-file process makes e-filing your return easier than completing by pen and paper as the web-based software calculates your tax, highlights many avoidable errors, and electronically transmits your return to the IRS. With no username or password, it is always free to try.
If you nevertheless want to mail it, the address can change from year to year as reported on the instructions for form 940. Here’s a link.
What Is Form 940, Schedule A?
Employers must complete Form 940: Schedule A- Multi-State Employer and Credit Reduction Information if they were required to pay state unemployment tax in more than one state or if they paid wages in any state or jurisdiction subject to credit reduction.
If you are completing Schedule A because you are a multi-state payer, you only need to indicate the name of each state in which you paid state unemployment tax. You do not need to enter in the amount of FUTA Taxable Wages attributable to each state.
If you are completing Schedule A because you paid wages in any state or jurisdiction subject to credit reduction, you need to enter the amount of FUTA Taxable Wages attributable to each credit reduction state or jurisdiction (i.e., up to $7,000 per employee per year). You do NOT enter in total wages.
What Is a Form 940 Credit Reduction State?
A state is a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame. A reduction in the usual credit against the full FUTA tax rate means that employers paying wages subject to unemployment insurance tax in those states will owe a greater amount of tax. Accordingly, if a state is designated a credit reduction state, the FUTA credit rate for employers in that state will be reduced until the loan is repaid, ultimately requiring employers to pay additional unemployment tax when filing Form 940, plus Schedule A.
For 2019-2021, only the US Virgin Islands is classified as a Credit Reduction State.
In the future, COVID-19 may impact the FUTA classifications as many states borrowed money from the Federal Government to help pay unemployment benefits. Thus far, almost 20 other states run the risk of a FUTA credit reduction for 2022 if their loans are not repaid by November 10, 2022.
What’s the Difference Between Form 940 and Form 941, Form 943, and Form 944?
Federal tax Form 941, Employer’s Quarterly Federal Tax Return, is the federal form employers use to report income taxes, Social Security tax, or Medicare tax withheld from employee’s paychecks. The form also is used to report the employer’s portion of Social Security or Medicare tax employee wages, payroll taxes and information the IRS deems important.
Federal tax Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, which is used instead of Form 941 to report once a year on the amount of withheld federal income and FICA taxes (the employee and employer share).
Federal tax Form 944, Employer’s Annual Federal Tax Return, which is filed instead of the quarterly employer returns if the employer is “small.” This applies to employers with annual tax liability withheld federal income tax, FICA (employee and employer share) totaling $1,000 or less.
Federal Tax Form 940, in contrast, is the Employer’s Annual Federal Unemployment (“FUTA”) Tax Return. The FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs. The business is responsible for the tax and does not come from employee wages.
Employer Compliance & Form 940
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If you need to e-file Form 940, don’t wait with the January 31, 2022 deadline looming.
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