Form 940

What Is Form 940?

Form 940 is a U.S. IRS tax form used by employers to report their annual Federal Unemployment Tax Act (FUTA) tax. This tax, along with state unemployment systems, funds unemployment benefits. Employers are responsible for paying this tax, not employees. Form 940 is used to report the employer's federal unemployment tax liability, calculate the amount of the tax, and report payments made toward the tax.

What Is the History of Form 940?

Form 940 was introduced as part of the Federal Unemployment Tax Act (FUTA) that was established in 1935. FUTA was created in response to the Great Depression to provide financial assistance to workers who had lost their jobs.

The idea was to establish a federal standard and fund for unemployment insurance, which until that point had been non-existent. Each employer would contribute to this fund through a federal tax, and these funds were then distributed to states to run their unemployment insurance programs.

Form 940 was, therefore, brought into existence as the means for employers to calculate and report their annual federal unemployment tax contributions. Over the years, the form has undergone numerous revisions to keep it updated with changes in the tax law and rates, but its fundamental purpose -- to serve as a means of reporting FUTA tax -- has remained consistent.

How Do You Calculate Form 940?

Calculating Form 940 involves several steps:

1. Determine which employees are subject to FUTA tax and which quarters their wages of $1500 or more were paid.
2. Calculate the total FUTA wages paid. Generally, the first $7000 paid to each employee as wages during the year is the FUTA wage.
3. Apply the FUTA tax rate to the FUTA wage. For 2020, the FUTA tax rate is 6.0%. Therefore, you multiply the total FUTA wages by 0.06 to get the initial FUTA tax.
4. If applicable, calculate the state unemployment tax credit. Employers who have paid state unemployment tax can claim a credit of up to 5.4% against the FUTA tax.
5. Subtract the state unemployment tax credit from the initial FUTA tax. This gives you the FUTA tax liability.
6. Once you've gone through the steps to calculate the FUTA tax, you can then complete and file Form 940 with the IRS.

Please note, it's very important to refer to the IRS instructions for Form 940 when calculating your FUTA to ensure accuracy and compliance with current tax law. It can also be beneficial to use a payroll service or consult with a tax professional.

Please remember to always consult with a professional tax advisor when dealing with tax forms and obligations.

What's the Difference Between Form 940 and FUTA (Federal Unemployment Tax Act)?

FUTA, or the Federal Unemployment Tax Act, is the U.S. federal law that requires employers to pay a tax used to fund state unemployment and job service programs. This tax helps to provide financial aid for workers who have lost their jobs.

On the other hand, Form 940 is the actual IRS document that employers utilize to report their annual federal unemployment tax, as required by FUTA. The form allows employers to calculate and report the amount of FUTA tax they owe based on the salaries and wages they've paid to their employees during the tax year.

So, FUTA is the law that establishes the tax, while Form 940 is the tool used by employers to report and calculate the tax they owe under FUTA.

What's the Difference Between Form 940 and Employer's Annual Federal Unemployment (FUTA) Tax Return?

There is no difference between Form 940 and the Employer's Annual Federal Unemployment (FUTA) Tax Return. They are two different names for the same document. The IRS refers to it as Form 940 but its full name is "Employer's Annual Federal Unemployment (FUTA) Tax Return." This form is used by employers to report their annual FUTA tax responsibility.

What Are the Benefits of Form 940?

Form 940 provides several benefits, primarily related to compliance, funding unemployment benefits, and ensuring employment stability. Here are a few key benefits:

1. Legal Compliance: Filing Form 940 annually with the IRS helps employers comply with the Federal Unemployment Tax Act (FUTA). Compliance helps avoid penalties from the Internal Revenue Service.

2. Funding Unemployment Benefits: The taxes reported and paid via Form 940 are used to fund state workforce agencies that provide unemployment benefits to eligible employees who lose their jobs.

3. Employment Stability: By effectively funding unemployment insurance programs, Form 940 indirectly aids in labor market stability. It provides temporarily displaced workers with economic help until they find new employment, which can encourage workforce participation.

4. State Tax Credits: Employers who comply with their state's unemployment tax rules and file Form 940 can earn credit reductions, lowering their overall federal unemployment tax liability.

What Are the Potential Drawbacks or Disadvantages Associated With Filing Form 940?

While it's generally not thought of in terms of disadvantages since filing Form 940 and paying FUTA taxes are legal requirements for employers, there are some potential challenges or inconveniences associated with it. Here are a few:

1. Cost: For businesses, especially smaller ones, the cost associated with FUTA taxes can be a financial burden. This is particularly true for businesses with high employee turnover, as the FUTA tax must be paid on the first $7000 of each employee's earnings per year.

2. Complexity: Determining FUTA tax liability can be complex. This is because various factors affect the amount of tax owed, such as the state where the business is located, the amount of wages paid to each employee, and whether the state has taken loans from the federal government to cover its unemployment benefits.

3. Time and Resources: Preparing and filing Form 940 can be time-consuming, particularly for businesses without a dedicated financial person or department.

4. Penalties: If Form 940 is not filed on time or contains errors, substantial penalties may be incurred. It's crucial for businesses to accurately complete and submit the form to avoid these penalties.

Remember, while these points may seem like drawbacks, compliance with FUTA and accurately filing Form 940 are requirements for most employers under US federal law. If you're unsure about any aspect, seek guidance from a financial advisor or tax professional.

Which Employers Are Likely to Be Affected by Form 940?

Most employers that pay wages of $1,500 or more during any calendar quarter in the current or previous year are likely to be affected by Form 940. Additionally, if an employer has one or more employees for at least some part of a day in any 20 or more different weeks in the current or preceding calendar year, they are also subject to FUTA tax and need to fill out Form 940.

This includes most types of businesses, such as corporations, small businesses, self-employed individuals with employees, and non-profits. However, certain payments, such as some types of agricultural and foreign labor, are excluded from FUTA tax.

It's also important to note that certain employers may qualify for state unemployment tax credits, which can reduce their FUTA tax liability. Always consult a tax professional to understand the specific requirements and how they apply to your situation.