An Employer’s Guide to IRS Form 940
Congratulations! Your business is off the ground and you’ve hired your first W-2 employees, now it’s time to learn what a Form 940 is.
As you prepare to run payroll, you’ll notice that there are multiple forms to complete, taxes to pay, and complexities to navigate. Maintaining a team takes more work than simply running payroll every two weeks.
One of the documents you’ll need to understand is IRS Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Not sure what this is or how to complete it? Read on for the details you need to know.
What is IRS Form 940?
In short, Form 940 is the place where you’ll report your FUTA tax. Most employers in the United States will need to file it with the IRS once per year.
Here, you’ll report the wages your company paid to all W-2 employees, including both full-time and part-time workers. The FUTA tax only applies to the first $7,000 you paid each employee that year. This amount is known as the federal or FUTA wage base.
Using the standard FUTA tax rate of 6%, you’ll then calculate how much your business owes to the IRS. Regardless of how much they make, you’re only liable for $420 FUTA tax maximum, per employee, per year (6% of $7,000).
Form 940 vs Form 941
At first glance, Federal Form 940 might look similar to another tax document, Form 941: Employer’s Quarterly Federal Tax Return.
While there are some areas of overlap between the two, there are also important differences.
Form 941 is completed and filed every quarter, and includes a place to report your federal income tax withholding and Federal Insurance (FICA) taxes. Those FICA taxes are considered shared taxes, with payment, split 50/50 between the employer and employee.
If you manage a very small business with an annual FICA and withholding tax liability of less than $1,000, you’ll file IRS Form 944 once per year, instead.
On the other hand, you’ll file Form 940 once annually, and it only reports your FUTA taxes. As the employer, you’re responsible for paying 100% of all FUTA taxes.
Do I Need to File One?
If you’re an employer in the U.S., you’re usually required to pay into Federal Unemployment benefits for your employees. If an employee is terminated from your workforce for issues that are not performance-related, these funds enable them to collect unemployment compensation.
Not sure if you’re required to complete the form? Ask yourself if the following conditions apply:
- You’ve paid at least $1,500 in wages to any W-2 employee at your company
- You’ve employed at least one W-2 employee (full-time or part-time) for a minimum of 20 weeks out of the past year.
If you can answer these statements affirmatively, you’re required to complete Form 940. However, the IRS does make two exceptions. The following entities are not required to pay FUTA taxes:
- Non-profit or religious organizations and any other 501(c)(3) accredited firm
- Businesses that work exclusively with independent contractors (not W-2 employees)
A tax accountant can help clear up any confusion on your requirements surrounding Form 940. If you’re unsure at all about your tax obligations, it’s best to double-check with an accountant.
A Step-by-Step Guide to Filling Out IRS Form 940
You’ve determined that you need to file this document, but how do you do it? Let’s take a look at the steps to follow when you’re ready to tackle your first Form 940.
Step 1: Gather Important Data
Before you begin filling out boxes and pulling out your calculator, there are a few key pieces of data to assemble. These include:
- The current FUTA tax rate (normally 6%)
- The number of employees you’ve had this year
- Each employee’s total salary
- The amount you paid in state unemployment (SUTA) tax that year
Step 2: Calculate How Much FUTA Tax You Owe
Thankfully, the calculation used to determine your FUTA tax obligation is relatively straightforward. To find it, you’ll multiply your total number of employees by the maximum taxable amount ($7,000). Then, you’ll multiply that figure by the current FUTA tax rate.
For instance, say your small business employed 15 people over the past year and they each made $25,000. Your FUTA tax calculation would look like this:
- (15 x $7,000) x 6% = $6,300
This means you’re responsible for paying $6,300 in FUTA tax. However, most small business owners make quarterly payments toward this amount throughout the year to offset year-end costs. If you did so, just subtract what you’ve already paid from the total amount that you owe.
Step 3: Calculating and Crediting SUTA Tax
In addition to FUTA taxes, most small business owners are also responsible for paying state unemployment (SUTA) tax. While these costs can feel overwhelming, the good news is that you can normally claim SUTA tax payments as credits on your FUTA tax obligation.
How does it work? You’ll simply subtract the SUTA tax rate for your state from the FUTA tax rate and pay the remainder. To determine your SUTA tax rate, go to your state’s Department of Labor website where it should be listed.
Say your SUTA rate is 4%. If the FUTA rate is 6%, and you’ve already made your required 4% payment to the state, you’ll only have to pay 2%. The IRS normally allows most employers to claim up to 5.4% in SUTA tax credits.
Let’s use the previous example to see how this calculation works in real life.
- 15 employees x $7,000 (maximum FUTA threshold) = $105,000
Say your state has a SUTA tax rate of 5.4% (the maximum). You’ve already paid this, so your federal tax obligation is only 0.6%. Now, instead of paying $6,300 in FUTA taxes, you only owe $630. That’s much better!
Submitting Your Form 940 to the IRS
Most business owners are required to submit Form 940 by January 31. What is the only exception? If you owe more than $500 in FUTA tax per quarter, you’ll need to file the form quarterly.
When your form is completed and ready to submit, you can send it to the IRS in a few ways. Your options include:
- E-filing and paying online
- Mailing in hard copies of your documents and payment
- Using an accountant who can file everything on your behalf
IRS Form 940: Simplified and Explained
It’s no secret that your tax obligations as a business owner can be complex and confusing. This is especially the case when you’re navigating Form 940 for the first time. This article can help you complete this documentation and mark it off your to-do list for the rest of the year!
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