Prepare for Tax Season: A Comprehensive Guide to Form 940 for Employers

Federal unemployment taxes, among various payroll taxes, are crucial responsibilities for employers. The FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) programs provide financial assistance to employers who have lost their jobs. Most businesses are required to file both FUTA and SUTA taxes on behalf of their employees. If you have hired and paid W-2 employees during the year, you are likely to file Form 940. Understanding these forms is essential for business owners to stay compliant with the IRS. Here is a quick overview of Form 940 and its filing requirements.

Before delving into Form 940, it’s crucial to understand FUTA taxes and tax credits.

What exactly are FUTA Taxes?

The FUTA (Federal Unemployment Tax Act) is a federal program that imposes payroll taxes on employers. The funds collected through this program are allocated to state unemployment insurance agencies, providing unemployment benefits to employees who have lost their jobs.

These FUTA taxes are solely paid by employers, meaning employees are not responsible for paying them. Generally, as an employer, you need to pay FUTA taxes and report the annual FUTA liability through Form 940 under specific conditions:

• If you have paid wages of $1,500 or more to your regular employees (W-2 employees) during the year, whether in the current or previous year.
• If you have employees who have worked or provided services for 20 or more weeks in the year. These 20 weeks can be non-consecutive and include full-time, part-time, and temporary employees.

However, there are exceptions to these rules:

• If your business involves hiring household employees, you are required to pay FUTA taxes only if you have paid $1,000 or more in cash wages to your employees in any quarter of the year.
• If your business involves hiring farmworkers, you are required to pay FUTA only if you paid $20,000 in cash wages or employed ten or more farmworkers for 20 weeks throughout the year.

Now that you know your responsibility for paying FUTA, let’s explore FUTA tax rates.

FUTA Tax Rates

Understanding FUTA tax rates is important for calculating your FUTA tax liability. FUTA tax rates vary each year; for 2023, the FUTA tax rate is 6% of the first $7,000 your employee makes in a tax year. If you are also paying state unemployment taxes, you may be entitled to a credit that reduces your FUTA tax liability. Generally, you can receive a credit of up to 5.4% of FUTA taxable wages, bringing down your FUTA tax rate to 0.6%.

You’ll be entitled to the maximum 5.4% FUTA tax credit if you paid state unemployment taxes in full and on time and your state isn’t a credit reduction state.

What are the Credit Reduction States?

A state is considered a credit reduction state if it has not repaid the loan borrowed from the federal government within the required time frame. In such cases, the IRS will reduce FUTA tax credits by a certain percentage until the state loan is repaid. The credit reduction states for 2023 are

• California (CA), with a credit reduction rate of 0.6%
• New York (NY), with a credit reduction rate of 0.6%
• The U.S. Virgin Islands (VI) with a credit reduction rate of 3.9%.

What is Form 940?

Form 940, also known as the Employer’s Annual Federal Unemployment Tax Return, is used to report your business’s FUTA tax liability during the year. This form should be filed annually by the business if you are required to pay FUTA taxes to your employees.

Information Required to File Form 940

Form 940 records various information, including:

• Business information such as EIN, legal name, trade name, and address
• State unemployment tax information
• FUTA tax before adjustments
• FUTA tax and balance due/overpayment
• FUTA tax liability by quarter

For line-by-line instructions on filling out Form 940, click here.

Deadline to File Form 940

You are required to file Form 940 each year on or before January 31. The deadline to report Form 940 for the 2023 tax year is January 31, 2023. However, you’ll receive an extension on this filing due date to February 10, 2024, if you’ve made all your required FUTA tax deposits by the dates they were due.

FUTA Tax Deposits

It’s essential to note that even though you file Form 940, you are also required to make quarterly deposits of taxes. FUTA tax deposits are required every calendar quarter unless your FUTA tax liability for that quarter is $500 or less. If your liability is $500 or more, the deadlines for depositing FUTA taxes are as follows:

• For the January to March calendar quarter, your deposit is due on April 30.
• For the April to June calendar quarter, your deposit is due on July 31.
• For the July to September calendar quarter, your deposit is due on October 31.
• For the October to December calendar quarter, your deposit is due on January 31.

New Changes in Form 940 for the 2023 Tax Year

Apart from the credit reduction states, Form 940 has undergone several changes as announced by the IRS. Key changes include:

1. Electronic Filing of Amended Form 940: The IRS is introducing electronic filing for amended Form 940. This modernization is aimed at improving efficiency and ease of compliance for employers.

2. New Form 940 (sp) Available in Spanish: For the tax year 2023, a new version of Form 940 (sp) will be available in Spanish. All employers now have the option to file the new Form 940 (sp) for the 2023 Tax Year.

How do you file your Form 940 with the IRS?

Form 940 can be filed either through traditional paper filing or electronically. The IRS strongly recommends e-filing due to its cost-efficiency and faster processing. Employers can use IRS-certified e-filing providers like TaxBandits for a streamlined and efficient filing experience.

TaxBandits supports various employment tax returns and forms, including Form 941, 943, 945, 1099, W-2, and ACA forms, making it a comprehensive e-filing solution for businesses, CPAs, and enterprises. With user-friendly features, TaxBandits simplifies the tax filing process, ensuring accuracy and compliance for the 2023 tax year.