Tax Form 940 - Federal Unemployment Tax

Every employer should have a basic understanding as to what 940 taxes are and whether or not they should have to pay them. If you are an employer you probably use Form 940to report annual Federal Unemployment Tax Act, also known as FUTA. This tax provides funds for paying unemployment compensation to workers who have lost their jobs. These taxes are paid by employers and do not come out of employees paychecks.

WHO SHOULD I FILE FORM 940?

An employer should file Form 940 once a year if: 1) the employer paid wages to the employee(s) of $1,500 or more in any quarter during that calendar year or in the preceding calendar year or 2) the employer had at least one employee for any part of the day for 20 or more weeks in a year or the previous year. If the business is sold in the middle of the year, both employers will need to file this form. In the year you shut your business down you should file a form 940 and check box d in the top right corner establishing that your business has closed. Tax exempt organizations do not need to file form 940.

WHEN SHOULD I FILE FORM 940

This form should be filed by January 31 after the end of the calendar year for which the form is filed. For example, form 940 for 2013 must be filed by January 31, 2014. If the employer properly paid the FUTA tax when it was due, the employer has 10 more calendar days to file its form 940. The IRS will accept form 940 as filed on time, even after the due date if the envelope containing the form is: 1) properly addressed; 2) contains correct postage and 3) is postmarked before the due date. An employer may request and extension not to exceed 90 days by filing a request that: 1) is in writing; 2) contain reasons for requesting the extension; 3) must be signed by employer his authorized agent; and 4) be properly addressed to IRS officer. However, an extension does not give you extra time to pay. The employer still must pay by the January 31 deadline.

PENALTIES FOR NOT FILING FORM 940

For each and any part of a month the Form 940 is not filed, there is a failure-to-file penalty of 5 percent of the unpaid tax due with that return with a maximum penalty of 25 percent of the tax due. Therefore, if you file it on April 3, you will be liable for 15 percent of the tax due. Also, for each month the tax is paid late, there is a failure-to-pay penalty of 0.5 percent per month of the amount of tax and also has a maximum of 25 percent of the tax due. The penalties will not be charged if the employer has reasonable cause for failing to file or pay. In addition to any penalties, interest accrues from the due date of the tax on any unpaid balance.

WHO CAN SIGN FORM 940

Form 940 can be signed by: 1 ) the individual if they have an employee, ie., household employee; 2) the president, vice president or other principal officer if a corporation; 3) a duly authorized member or officer if partnership or unincorporated organization; or 4) the fiduciary if the person is a trust or estate. The IRS back in 2005 issued a Bulletin that corporate officers or duly authorized agents may sign Form 940 by rubber stamp, mechanical device, or computer software program.

WHEN TO PAY FUTA TAXES   

FUTA taxes must be paid quarterly by the last day of the month following the end of a calendar quarter. For example, January, February, and March FUTA tax must be paid by April 30th. The latest quarterly payment dates are April 30th, July 31st, October 31st and January 31st. If your FUTA payment for a quarter is under $500, you don’t need to send in a quarterly payment, but can pay the amount at the end of the year. Payments for FUTA taxes must be submitted through the Electronic Federal Tax Payment System (EFTPS) . This is not the same as e-file for business which is for submitting tax returns, rather than making payments. To use EFTPS, you will need a Federal Employer Identification Number.

HOW MUCH DO I HAVE TO PAY FOR FUTA TAX

The FUTA tax is 6.0% on the first $7,000 of earnings per employee. After $7,000, there is no further FUTA tax. However, if you pay your State unemployment Tax Act, also known as, SUTA taxes, the tax is reduced to 0.6% for most states. The maximum FUTA Tax Rate is 6.0%, however, in the practice the effective FUTA tax rate is much lower. Your company will pay a maximum FUTA tax of $105 per employee per year.

Hopefully this answers any questions you have in regards to 940 Federal Unemployment Taxes Act. If you have any questions please contact us. This article was written by Evan Wolf, Esq with Wolf Tax.