Form 940 is the tax form used by employers in the United States to report their annual Federal Unemployment Tax Act (FUTA) tax to the Internal Revenue Service (IRS). The FUTA tax provides funds to the federal government to pay unemployment compensation to workers who have lost their jobs. Form 940 is essential for compliance with federal tax regulations and ensures that employers contribute to the unemployment insurance system.
Explanation and Key Details
Federal Unemployment Tax Act (FUTA)
The FUTA tax is a payroll tax that employers pay to the federal government to fund unemployment benefits for workers who are unemployed through no fault of their own. Unlike Social Security and Medicare taxes, FUTA tax is paid entirely by the employer and not deducted from employees’ wages.
Purpose of Form 940
Form 940 allows employers to:
- Report annual FUTA tax liability.
- Reconcile the FUTA tax paid throughout the year.
- Calculate any FUTA tax due or overpaid.
Employers must file Form 940 annually, even if they have no FUTA tax liability for the year.
Filing Requirements
Employers must file Form 940 if they meet the following criteria:
- Employee Wages: Paid wages of $1,500 or more in any calendar quarter during the year or the previous year.
- Household Employers: Paid cash wages of $1,000 or more in any calendar quarter to household employees.
- Agricultural Employers: Paid wages of $20,000 or more to agricultural workers in any calendar quarter or employed 10 or more agricultural workers for some part of a day in 20 or more different weeks in the year.
Deadlines
Form 940 must be filed by January 31st of the year following the calendar year being reported. If all FUTA taxes have been deposited on time, the filing deadline may be extended to February 10th.
Calculating FUTA Tax
Tax Rate
The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages. However, employers can receive a credit of up to 5.4% for state unemployment taxes paid, effectively reducing the FUTA tax rate to 0.6%.
Example Calculation
If an employer has three employees who each earn $10,000 annually, the FUTA tax calculation would be:
- Apply the $7,000 wage base limit: $7,000 * 3 employees = $21,000 total taxable wages.
- Calculate the gross FUTA tax before state credit: $21,000 * 0.06 = $1,260.
- Apply the maximum state credit: $21,000 * 0.054 = $1,134.
- Net FUTA tax after state credit: $1,260 - $1,134 = $126.
Historical Context
Form 940 and the FUTA tax were established by the Federal Unemployment Tax Act of 1939. This legislation created a national payroll tax to provide temporary funding for unemployed workers. Over the years, the form and regulations have evolved to adapt to changing economic and workforce conditions.
Applicability
All employers who meet the wage thresholds must file Form 940, making it a critical aspect of business operations and financial management for employers across the United States. It ensures continued funding of unemployment insurance benefits, which is a vital safety net for workers.
Related Terms
- Form 941: IRS form for reporting quarterly Social Security, Medicare, and income taxes withheld from employees’ wages.
- State Unemployment Tax (SUTA): State-level taxes that employers pay to fund state unemployment benefits.
- Wage Base Limit: The maximum amount of an employee’s wages subject to FUTA tax, which is currently set at $7,000.
FAQs
Who is required to file Form 940?
When is Form 940 due?
How do I obtain Form 940?
References
- IRS. (2023). Instructions for Form 940. Retrieved from IRS website.
- U.S. Department of Labor. (2023). Federal Unemployment Tax Act. Retrieved from Department of Labor website.
Summary
Form 940 is a critical tax document that employers use to report and pay their annual FUTA tax. This form ensures that unemployment insurance benefits are funded, providing essential support to workers who have lost their jobs. Employers must understand their obligations to remain compliant with federal tax laws and contribute to the social safety net.
