IRS Form 940: Small Businesses’ Guide For Tax Filing

• admin
• February 19, 2025
• 6 min read

IRS Form 940 Instructions: A Complete Overview

Navigating the complexities of federal tax forms is a crucial responsibility for small business owners. One such essential form is IRS Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return. This form plays a pivotal role in funding unemployment compensation for workers who have lost their jobs. Understanding and accurately completing Form 940 ensures compliance and contributes to the financial well-being of your former employees.

Key Takeaways

• Purpose of Form 940: Reports annual Federal Unemployment Tax Act (FUTA) tax, aiding in unemployment compensation.
• Filing Requirements: Applies to businesses paying $1,500+ in wages in a quarter or employing workers for 20+ weeks annually.
• Important Deadlines: Annual filing by January 31; extended to February 10 if all FUTA taxes are timely deposited.

Understanding Federal Unemployment Tax Act (FUTA)

The Federal Unemployment Tax Act (FUTA) establishes a program jointly administered by the federal and state governments to provide unemployment compensation to workers who have lost their jobs. Employers are responsible for paying FUTA tax; it is not a deduction from employees’ wages. The standard FUTA tax rate is 6% on the first $7,000 of each employee’s wages. However, employers can receive a credit of up to 5.4% for timely payments to state unemployment funds, effectively reducing the FUTA tax rate to 0.6%.

Who Must File Form 940?

As a small business owner, you are required to file Form 940 if you meet either of the following criteria:

• Wage Threshold: You paid wages of $1,500 or more to employees in any calendar quarter during the current or previous year.
• Employment Duration: You had one or more employees for at least part of a day in 20 or more different weeks in the current or previous year. This includes full-time, part-time, and temporary employees.

Certain types of employment are exempt from FUTA tax, such as services performed by a sole proprietor’s spouse, parent, or child under the age of 21.

Completing Form 940: Step-by-Step Guide

Accurately completing Form 940 involves several key steps:

1. Gather Essential Information

Before you begin, ensure you have:

• Employer Identification Number (EIN): A unique number assigned by the IRS to identify your business.
• Total Payments to Employees: The sum of all wages paid during the calendar year.
• Exempt Payments: Amounts not subject to FUTA tax, such as fringe benefits, group-term life insurance, and retirement/pension contributions.
• State Unemployment Contributions: Details of payments made to state unemployment funds, including any outstanding amounts.

2. Calculate Taxable Wages

• Total Payments: Start with the total payments made to all employees.
• Subtract Exempt Payments: Deduct any payments exempt from FUTA tax.
• Subtract Excess Wages: For each employee, subtract wages exceeding $7,000, as FUTA tax applies only to the first $7,000 of each employee’s wages.
• Result: The remaining amount is your taxable FUTA wages.

3. Determine Gross FUTA Tax Liability

Multiply your taxable FUTA wages by the standard FUTA tax rate of 6% to determine your gross FUTA tax liability before adjustments.

4. Apply Credits

If you made timely payments to state unemployment funds, you might be eligible for a credit of up to 5.4%, reducing your effective FUTA tax rate to 0.6%. Ensure all state contributions are current to claim the full credit, thereby maximizing your savings and optimizing your revenue.

5. Account for Credit Reductions

Some states are classified as “credit reduction states” if they have outstanding federal loans. Employers in these states must pay an additional FUTA tax. For 2025, refer to the Department of Labor’s annual list to determine if your state is affected.

6. Report FUTA Tax Liability by Quarter

If your FUTA tax liability exceeds $500 for the calendar year, you must deposit at least one quarterly payment. Report the liability for each quarter on Form 940, even if you made deposits.

7. Sign and Submit the Form

After completing all sections, ensure the form is signed by an authorized individual as per the given instructions. Unsigned forms may lead to processing delays.

Filing Deadlines and Methods

• Due Date: Form 940 is due by January 31 each year. If you’ve deposited all FUTA taxes on time, the deadline extends to February 10.
• Electronic Filing: The IRS encourages electronic filing for faster processing and confirmation. Utilize the Modernized e-File (MeF) system for submitting Form 940.
• Mailing Addresses: If filing by mail, send the form to the appropriate IRS address based on your business’s location. Addresses are available on the IRS website.

Payment of FUTA Taxes

• Deposit Requirements: If your FUTA tax liability exceeds $500 for the year, deposits must be made quarterly. Liabilities of $500 or less can be paid with the annual return instead of quarterly deposits. If the liability exceeds $500 at any point in the year, you must start making quarterly deposits.
• Deposit Due Dates:
  • Q1 (Jan – Mar): Due by April 30
  • Q2 (Apr – Jun): Due by July 31
  • Q3 (Jul – Sep): Due by October 31
  • Q4 (Oct – Dec): Due by January 31 of the following year
• How to Make Payments:
  • Use the Electronic Federal Tax Payment System (EFTPS) for fast and secure payments.
  • If mailing a payment, use IRS Form 940-V (Payment Voucher) and follow IRS guidelines for accepted payment methods.

Common Mistakes to Avoid

Filing Form 940 correctly is crucial for avoiding IRS penalties. Here are common pitfalls:

• Failing to File on Time: A late filing can result in penalties of up to 5% of the unpaid tax per month, up to 25% of the total tax due.
• Incorrect Wage Calculations: Double-check that you only include the first $7,000 of each employee’s wages.
• Missing State Unemployment Credit Reductions: Ensure you account for any credit reduction state adjustments.
• Not Depositing Taxes on Time: If your FUTA tax liability exceeds $500, failure to make timely deposits can lead to penalties and interest.

FAQs

1. Can self-employed individuals file Form 940?
No, self-employed individuals do not file Form 940 since FUTA tax applies only to employers with employees.

2. What happens if my business has no employees for the year?
If you did not pay wages to employees and have no FUTA liability, you do not need to file Form 940 for that year.

3. Can I amend a previously filed Form 940?
Yes, you can amend a filed Form 940 using Form 940-X, Adjusted Employer’s Annual Federal Unemployment (FUTA) Tax Return.

Empower Your Business with Compliance

Understanding Form 940 is essential for small business owners to remain compliant with federal tax laws and avoid penalties. Keeping accurate payroll records, making timely payments, and leveraging electronic filing can streamline the process. For more information or to access Form 940 and instructions, visit the IRS official website. Additionally, explore FileLater for guidance on business tax extensions and other related resources.