Any small business owner will tell you how challenging it can be to keep up with the necessary forms for their taxes and the number of changes to tax law each year.
Knowing when to complete certain forms, is it a quarterly or yearly requirement? Knowing what forms are actually needed for the IRS can feel daunting without the proper tax help.
Form 940 is one of the forms required each year from businesses during tax time.
What does Form 940 tell the IRS about your business? What information is included? Read on to learn more about what your business needs to know about Form 940 this tax season.
What Are Federal Unemployement Taxes (FUTA) Taxes for Employers?
To understand Form 940, you must first understand FUTA. FUTA is the federal unemployment taxes. These taxes are required to be paid by businesses because of the Federal Unemployment Tax Act (FUTA).
Since the government provides federal support for those who are unemployed, these taxes must be paid by a business to contribute to the federal unemployment taxes.
Who Pays FUTA?
While FUTA provides unemployment benefits for employees who are no longer working, they are not paid by employees. Because of this, the employer will not deduct the cost of FUTA from an employee’s wages.
Instead, the employer is required to pay FUTA. So, what is the employer required to pay, and for who?
Generally, two conditions mandated by the IRS require you to pay FUTA. They include:
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- Any employee who’s earned $1,500 or more during any quarter of the year
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- One or more employees working a minimum of at least 20 weeks during the year’s tax season (this includes all temporary, part-time, and full-time employees)
There are also additional requirements for unusual situations, including household and agricultural workers. If this might apply to you, be sure to check with your tax specialist.
FUTA Exemptions
The IRS does provide several exemptions that don’t require the payment of FUTA taxes.
The exemptions are for the following groups:
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- Tax-exempt charitable organizations (501(c)(3) organizations)
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- Local and state government employers
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- Indian tribe government employers if they are a part of their state unemployment programs for at least a year
Some individuals with nonimmigrant status are also exempt.
Tax Rate for FUTA
The IRS makes adjustments to tax rates yearly for both individuals and businesses. FUTA tax also typically has yearly adjustments.
The 2022 tax year requires employers to pay 6% of the first $7,000 in wages for employees on your payroll who are eligible for FUTA taxes.
Doing the math, this means a business should know that the most they’ll need to pay for each employee is $420 in FUTA taxes during the 2022 tax year.
Tax Credits for FUTA
During your yearly tax filings, you’re probably looking for options for tax credits. There is a tax credit to reduce your FUTA tax liability.
Your business can eligible for this tax credit if you’re also paying state unemployment taxes.
This tax credit is for 5.4% of your FUTA taxable wages for what you’ve paid to the state unemployment fund.
Again, the rules are complex, so check with your tax specialist.
Form 940 Basics for FUTA Taxes
Now that you understand FUTA, you can better understand the role of Form 940. This form is the tax return form (Employer’s Annual Federal Unemployment Tax Return) the IRS requires if you have to pay FUTA taxes.
If your tax liability for FUTA is more than $500 per quarter, a business is required to make quarterly deposits via EFT, like other taxes they pay to the IRS.
These taxes are due to the IRS on the last day of the first month following the end of the previous tax quarter. Form 940 is used to report all the tax payments made for each quarter throughout the year.
Filling Out Form 940
The IRS provides a tax return guide for Form 940. You can also download this form from their website. You can fill in their PDF form or fill in the form by hand to file it with your yearly taxes.
Let’s take a closer look at what’s required on the form.
General Information
The first part of Form 940 asks for general identifier information for your business. This includes your business information like:
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- Employer Identification Number (EIN)
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- Legal name of your business
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- Trade name of your business if one is used
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- Address
There is a section called Type of Return, where you check all the boxes that apply to your tax filing.
Part 1: Which State(s)
Part 1 of the form asks you to identify information about state unemployment taxes. The IRS wants to know:
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- Do you employ employees in only a single state? (Line 1a)
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- Do you employ employees in multiple states? (Line 1b)
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- Do you have employees whose wages were paid in a credit reduction state? (Line 2)
Part 2 – FUTA Taxes Paid
In Part 2, you’ll identify all the FUTA taxes you paid before there were any adjustments.
Lines 3 through 8 will guide you through the calculations for this section.
Part 3 – Calculate Any Adjustments
In Part 3, you will calculate any adjustments to your FUTA tax payments. There are three scenarios, depending on your status with state-paid unemployment taxes.
Part 4 – Calculate Overpayment or Balance Due
In Part 4, you will use what you’ve paid in FUTA taxes and subtract your adjustments. This will help you to know if you have overpaid your taxes or have a balance due.
Part 5 – Use if Underpaying
Part 5 is only required if you figure you’ve been underpaying by $500 or more. This section sets you up on the quarterly payment schedule.
Part 6 – Third Party Permission if Applicable
Many businesses have either a designated employee or a third party handling their payroll issues and taxes. This section asks you to provide permission for the IRS to talk to that third party if they have questions or issues with the form.
Part 7 – Signature & Contact Informatin
This section requires your signature and contact information for the IRS. There is also a section in Part 7 for a paid preparer if someone who isn’t employed by you directly completed this form on behalf of your business.
The Importance of IRS Form 940 for Your Business
Form 940 is an important required IRS form for businesses to document the unemployment tax they pay on behalf of their employees.
If your business is looking for more tax credits to help with your tax liability, we can help. Check out the application to see what business tax credits we can find.
