<– Guide to IRS Forms

Form 940 is the annual Federal Unemployment Tax Act (FUTA) report that employers must file. The form is used to report the amount of FUTA tax that an employer has paid during the year.

During the Great Depression, 25 percent of American workers were unemployed. There was no unemployment insurance at the time, and people were in dire straits.

As a result, Congress passed a bill to relieve Americans of this crisis. It would also address future economic declines. The bill requires employers to contribute to a national fund for unemployment insurance benefits.

Most employment taxes require the employer to match the employees’ contributions. However, the employee does not contribute to the unemployment insurance fund. Instead, employers are liable for the whole contribution.

IRS Form 940: What is the FUTA?

Let’s talk more specifically about the FUTA. For example, it’s separate from state unemployment insurance (UI), which also goes to the federal unemployment fund.

The FUTA tax rate is currently 6.0 percent after the first $7,000 of wages paid to employees during the year. However, employers can claim a credit for state UI   they paid. This reduces the amount of FUTA tax they owe. The   credit is 5.4 percent, which means that the effective FUTA tax rate for most employers is 0.6 percent.

The FUTA tax is overseen by the Internal Revenue Service (IRS), which is perhaps not so surprising. FUTA requires employers to report and pay the tax annually by filing Form 940 with the IRS.

Employers who have no employees during a calendar quarter have no FUTA tax liability for that quarter. If, however, they have employees in other quarters of the same calendar year, they need to file Form 940 annually.

Reporting FUTA Contributions on Form 940

On the form, you will report the total wages paid to employees during the year, as well as the number of employees, and the amount of FUTA tax you paid. You will also need to report any adjustments   credits that you are claiming against the tax, such as the credit for state unemployment taxes paid.

Tax laws change frequently. For the following section, we’ll be referring to “Form 940 for 2022”. If you’re working on a FUTA report for another year, be sure to apply the tax law from the corresponding year. Contact a tax professional for more details.

Top Section/Bottom Section

These sections are self-explanatory.

In the top section, fill in your employer identification number (EIN), name, trade name if you have one, and address. Check the type of return in the box on the right.

In the bottom section, sign and print your name.

Part 1

This part shows in which states the employer contributed unemployment taxes.

Part 2

Show your FUTA tax liability here. Carefully fill in these boxes and do the calculations. Remember to exclude the first $7,000 of wages you paid to employees.

Part 3

This is where you record and calculate the adjustments to your tax liability.

Part 4

This part shows your total FUTA tax, including adjustments. At this point, it’s clear whether the employer owes the IRS, or the IRS owes the employer a refund.

Part 5

Calculate the breakdown of the balance due into quarters in this part. This is only necessary if the total in Part 4 exceeds $500.

Part 6

Lastly, Form 940 offers you the option to designate a third party to work with the IRS on behalf of the employer.

Who Needs to File the FUTA Report?

The IRS generally uses three tests to determine which employers need to pay FUTA tax.

1. General Test (Note: this does not apply to wages you pay household or agricultural employees)
   • You paid at least $1,500 to employees in any calendar quarter (during 2020 or 2021), or
   • You had at least one employee for at least part of one day in any one of 20 different weeks in 2020 or 20 or more different weeks in 2021. Include all full-time, part-time, and temporary employees.

In other words, says The Balance Money, “the form is required if you paid wages of $1,500 or more to employees in a calendar quarter or if you had one or more employees for part of a day in any 20 or more different weeks in the last two years.”

2. Household Employers Test
   • Contact your tax professional for information.

3. Agricultural Employers Test
   • Contact your tax professional for information.

Pro-Tips for Filing a FUTA Report

When:

• IRS Form 940 is typically due on January 31st of the year following the tax year. For example, if you are an employer and you paid wages in 2022, you would file your FUTA report for 2022 by January 31, 2023.

Completing the Form:

• If any line does not apply, leave it blank.
• Be sure to complete both sides of the form (2 pages in total, 7 parts)

Submitting the Form:

• The IRS accepts e-Filing of this form.

Questions:

• Contact a reputable and experienced tax professional.

Getting Help

Filing Form 940 is essentially the same as filing another tax return for the wages you paid your employees. It’s complex and confusing. But the IRS has no mercy when it comes to penalties and interest that can accrue if you don’t do it correctly and on time.

Save yourself time, money, and headaches by calling a reputable tax professional for help. Advanced Tax Team has an A rating at the Better Business Bureau. We pride ourselves on the service our team provides.

Give us a call at 877.959.0975 today. We offer a free consultation to determine your best options. We’ll answer your questions and offer our expertise. None of our staff work on commission, so no high-pressure sales pitch here!

Give us a call today, and sleep with more peace of mind tonight.

Resources

1. “About Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.” Internal Revenue Service, https://www.irs.gov/forms-pubs/about-form-940.
2. “Federal Unemployment Tax Act (FUTA).” Legal Information Institute, Legal Information Institute, https://www.law.cornell.edu/wex/federal_unemployment_tax_act_(futa)#:~:text=Federal%20Unemployment%20Tax%20Act%20(FUTA)%20was%20the%20bill%20passed%20in,tax%20to%20fund%20unemployment%20benefits.
3. “Form 940 Overview and Deadline.” Employer Services Insights, 24 Oct. 2022, https://www.experian.com/blogs/employer-services/form-940-purpose-and-deadline/.
4. Murray, Jean. “What Is IRS Form 940?” The Balance, The Balance, 20 Sept. 2022, https://www.thebalancemoney.com/irs-form-940-unemployment-tax-report-explained-397958.
5. “Topic No. 759 Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return – Filing and Deposit Requirements.” Internal Revenue Service, https://www.irs.gov/taxtopics/tc759.