Form 940: What It is, When To File And Filing Instructions

Staying on top of all the tax regulations and filings as a business owner can be complicated. Considering the amount of tax paperwork that companies, whether small or large, must manage and submit regularly, a form or a filing deadline can easily slip through the cracks.

To err is human, but each mistake you make as a business owner will cost you money in Internal Revenue Service (IRS) fees. A solid understanding of the paperwork the IRS requires you to submit is the first step to preventing your company from losing money on these hefty fines.

Form 940, or the Employer’s Annual Federal Unemployment (FUTA) Tax Return, is one of the tax forms that most businesses with at least one employee must submit yearly. Yet, the specific criteria for filing it can confuse business owners and cause mistakes.

Understanding what the IRS Form 940 is and how to file it will help you manage your business’s federal unemployment tax obligations effectively — and prevent any fines. Let’s take a look at what Form 940 is all about.

What Is Form 940?

Form 940 is the Employer’s Annual Federal Unemployment Tax Return. Think of it as your business’s yearly check-in with Uncle Sam about unemployment taxes. It’s the form you use to report how much you’ve shelled out in wages and calculate the unemployment taxes you owe. These aren’t taxes taken from your employees’ paychecks, though — they’re your contribution as an employer to the state unemployment funds.

Form 940 helps the federal government keep tabs on what’s going into unemployment programs across the country. These programs are the financial lifeline for people companies laid off or let go, helping them stay afloat while they hunt for new jobs. While FUTA taxes help cushion the blow of unemployment temporarily, Social Security is in it for the long haul, providing a broader safety net.

What Is the Purpose Of Form 940 In Tax Reporting

The main purpose of the federal Form 940 is to make sure that you, as an employer, contribute to the federal unemployment tax system. This system is essential as it funds state unemployment agencies, which in turn provide unemployment benefits to eligible workers who are unemployed through no fault of their own. Reporting accurately via Form 940 is key to keeping this system functional and effective.

By complying with the FUTA tax requirements and filing Form 940, you help provide benefits for workers who need financial support after losing their jobs. This tax provides the funds for unemployment benefits, which directly support workers who have lost their jobs and provide them with temporary financial assistance.

Who Needs To File Form 940?

If you’re an employer, you might wonder whether you must file Form 940. The answer is fairly simple. You must file it if you have paid $1,500 or more in wages in any calendar quarter of the fiscal tax year. Or if you had at least one employee on the payroll for at least some part of a day in any 20 or more weeks of the year. This includes all types of employees, regardless of whether they are full-time, part-time, or seasonal.

However, note that the following employers do not have to pay FUTA taxes:

1. Indian tribal government employers who have been part of the state unemployment system throughout the entire year
2. Charitable organizations with tax-exempt status under 501(c)(3)
3. State and local government employers

Additionally, the earnings of individuals holding nonimmigrant statuses such as H-2A, F-1, J-1, M-1, or Q-1 may be exempt if their work involves specific exempt services. If you’ve taken over another business as a successor employer, be aware of potential changes in your FUTA tax obligations.

All employers meeting these criteria must file Form 940 annually. This helps ensure everyone contributes fairly to state unemployment insurance, which benefits workers across the nation. Staying informed about these requirements can prevent potential fines from the IRS for non-compliance, like fines or late fees.

Criteria For Filing It

In addition to the filing criteria we covered in the previous section, there are some specific exemptions to keep in mind to determine if you need to submit Form 940:

1. If you’re employing household staff, like those in private homes or college clubs, you’ll need to pay FUTA tax if you’ve paid out $1,000 or more in cash wages in any quarter of the fiscal year.
2. If your business is in agriculture, the rules are a bit different. You hit the FUTA tax requirement if you’ve paid out $20,000 in cash wages in any quarter. Or if you’ve had 10 or more farm workers clocking in for at least part of a day during 20 or more weeks of the year. If any of your farm workers are on H-2A visas, their wages count towards your total cash wages for determining if you meet the FUTA threshold, but you don’t have to pay FUTA taxes on these specific wages.

Deadlines And Timing For Filing Form 940

If you’ve established that your business requires a Form 940, the next thing you must be aware of is its filing deadline. You will need to submit this form every year.

Annual Filing Deadline

Form 940 is due by January 31st of the year following the reported year. For instance, taxes accrued in 2024 are due by January 31st, 2025. If you’ve paid all your FUTA tax by the end of the year, the IRS extends this deadline to February 10th.

Remember to put these deadlines in your calendar to avoid missing them.

Extension And Late Filing Penalties

There are no extensions for the filing of Form 940. Therefore, preparing ahead to meet the January deadline is critical. If you miss the deadline for filing, there’s a 5% penalty on the tax due for each month, or even part of a month, that your form is late. This penalty can accumulate up to 25%.

On top of late filing fees, paying the tax late also incurs penalties. These start at 2% and can reach up to 15%. Such penalties underline the importance of timely submission of both the form and its associated payments.

Timeliness in these matters helps avoid unnecessary financial strain and keeps your business in good standing with the IRS. It’s a straightforward yet critical part of managing your company’s payroll taxes effectively.

Step-By-Step Filing Instructions

Filing Form 940 is straightforward — as long as you prepare thoroughly and have all the required documents. Let us walk you through each step:

Prepare To File: Information And Documents Needed

Start by collecting all necessary documents and information. You'll need your Employer Identification Number (EIN) and the total amount of employee wages paid during the year. Additionally, gather records of any state unemployment tax you have paid. Having these documents at hand before you begin will streamline the filing process.

Make sure you also have access to your company's address and contact information, as these are required on the form. Double-check that all records are up-to-date to avoid discrepancies, which could lead to delays or penalties.

Complete Each Part Of The Form

Form 940 has several parts, each with its requirements. Here’s what they cover:

1. General information section: Fill out business identification details such as EIN, legal and trade names, and business address, and specify the type of return.
2. Part 1 (State Unemployment Tax Information): Indicate if you are a single-state or multi-state employer and if you paid wages in a credit reduction state. If you’re a multi-state employer or paid wages in a credit reduction state, you’ll have to submit a Schedule A Form 940. Employers in credit reduction states must pay attention to increased FUTA tax liabilities due to their credit reduction rates, impacting overall tax calculations on Form 940.
3. Part 2 (FUTA Tax Before Adjustments): Calculate your FUTA tax before tax adjustments by reporting total payments to employees and exempt payments.
4. Part 3 (Adjustments): Make necessary adjustments for exemptions or late state unemployment tax payments.
5. Part 4 (FUTA Tax and Balance Due/Overpayment): Summarize FUTA tax after adjustments and deposits made, and calculate any balance due or overpayment.
6. Part 5 (FUTA Tax Liability by Quarter): If applicable, report your FUTA liability for each calendar quarter.
7. Part 6 (Third-Party Designee): Optionally authorize a third party to discuss the return with the IRS.
8. Part 7 (Signature): Sign and date the form, with a section for paid preparer if applicable.

Calculate FUTA Tax Liability

Calculating your FUTA tax liability is a critical step in completing Form 940. Here’s how to do it:

1. Determine the FUTA taxable wages from Part 2 of the form.
2. Multiply these wages by 0.6% (0.006), which is the 2024 FUTA tax rate after state credits.

Be aware that the FUTA tax rate may be higher if you have not paid enough in state unemployment taxes or if your state does not qualify for the full credit. Confirm that all calculations are accurate to prevent any underpayment or overpayment.

Navigate Tax Filings Successfully

Navigating Form 940, along with all other tax obligations, is an unavoidable part of being a business owner. Although it can be tedious, following the Form 940 instructions carefully can help prevent fines and other major headaches down the road.

Still have questions? Learn how bookkeeping and accounting plans can take most of the financial planning off your plate, as well as leaning into  business tax advisors so you can focus on what matters most: growing your startup.    

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