Form 940
Form 940
What is Form 940?
Form 940 is an IRS tax form that employers use to report and pay the Federal Unemployment Tax Act (FUTA) tax. The FUTA tax funds unemployment benefits for workers who lose their jobs. Unlike Social Security and Medicare taxes, only employers pay FUTA tax, and it is not deducted from employee wages.
Who Needs to File Form 940?
Employers must file Form 940 if they meet one of the following conditions:
- Paid at least $1,500 in wages to employees during a calendar quarter.
- Had one or more employees working for any part of at least 20 weeks in a calendar year (full-time, part-time, or temporary).
Household employers and farm employers have different filing requirements and may not need to file Form 940.
How to Calculate FUTA Tax
The standard FUTA tax rate is 6.0% on the first $7,000 of each employee’s annual wages. However, most employers qualify for a FUTA tax credit of up to 5.4% if they pay state unemployment taxes on time, reducing the effective FUTA rate to 0.6%.
Example Calculation
- An employer has 10 employees, each earning at least $7,000 annually.
- FUTA tax before credit: 10 × $7,000 × 6.0% = $4,200.
- After a 5.4% credit: 10 × $7,000 × 0.6% = $420.
- Total FUTA tax owed: $420.
Filing Deadlines for Form 940
Form 940 is due annually, by January 31 of the following year. However, if an employer deposits all FUTA taxes on time, they receive an extended deadline until February 10.
How to File Form 940
Employers can file Form 940 using the following methods:
- Electronically: The IRS e-file system allows faster processing and confirmation.
- By Mail: Paper filing is available, but processing takes longer.
Employers must also deposit FUTA taxes quarterly if their liability exceeds $500. Payments are made through the Electronic Federal Tax Payment System (EFTPS).
Penalties for Late Filing or Payment
Employers who fail to file Form 940 or pay FUTA taxes on time may face penalties, including:
- Late Filing Penalty: 5% of the unpaid tax per month, up to 25%.
- Late Payment Penalty: Ranges from 2% to 15%, depending on the delay.
- Interest Charges: The IRS applies interest on unpaid taxes until fully paid.
Key Differences Between Form 940 and Form 941
Employers often confuse Form 940 with Form 941, but they serve different purposes:
| Feature | Form 940 | Form 941 |
|---|---|---|
| Purpose | Reports FUTA (federal unemployment) tax | Reports federal income, Social Security, and Medicare tax |
| Who Pays? | Only employers | Both employers and employees |
| Filing Frequency | Annually | Quarterly |
| Tax Rate | 6.0% (up to $7,000 per employee) | Varies based on wages and tax rates |
How to Avoid FUTA Tax Mistakes
To stay compliant with IRS regulations, employers should:
- Keep accurate payroll records.
- Deposit FUTA taxes quarterly if the total liability exceeds $500.
- File Form 940 on time to avoid penalties.
- Ensure they qualify for the FUTA tax credit by paying state unemployment taxes promptly.
Key Takeaways
- Form 940 reports and pays the Federal Unemployment Tax Act (FUTA) tax.
- Only employers pay FUTA tax—employees are not responsible for contributions.
- The FUTA tax rate is 6.0%, but most employers qualify for a credit that reduces it to 0.6%.
- Filing is required annually by January 31, with deposits made quarterly if liability exceeds $500.
- Penalties apply for late filing or payment, so timely compliance is essential.
For more details, visit the IRS website on Form 940.