subject: Payroll Tax Forms: What Is Form 940 And Why Must You File It? [print this page] Any small business owner with employees must file Form 940. The purpose of this article is to help you understand what Form 940 is all about and why you must file it. Not filing is not an option. Not filing will result in a letter from the IRS wondering why you haven't filed this tax return. And not filing could result in penalties that you really want to avoid. So read on to get an overview of this payroll tax requirement.
The purpose of Form 940 is to report your federal unemployment tax liability, aka "FUTA", which stands for "Federal Unemployment Tax Act". Every employer must pay federal unemployment tax to the IRS. The employee does not pay the tax, nor can the employer withhold this tax from employee wages. This tax is used to pay unemployment compensation to workers who lose their jobs.
The tax is usually 0.8% of the first $7,000 of wages paid to each employee each year. So if an employee's compensation is $7,000 or more in a given year, the employer pays $56 ($7,000 x 0.8%) in federal unemployment tax. If the employee's compensation is less than $7,000, the FUTA is calculated as follows: compensation x 0.8%.
The IRS requires that the tax be paid quarterly whenever the FUTA quarterly liability exceeds $500. If the quarterly liability is less than $500, then no payment is required and that quarter's liability is carried over to the next quarter. Example: in the first quarter, your FUTA liability is $400, so no payment is required. In the second quarter, your FUTA liability is $300. So now that your total year-to-date liability (first and second quarters combined) is $700, you must pay the entire $700 because that amount exceeds $500. In the third quarter, your liability is $400, but no payment is required. In the fourth quarter, you must pay any remaining liability for previous quarters as well as the fourth quarter, regardless of the amount, even if the liability is less than $500.
Form 940 is only filed at the end of year and is due by January 31 of the following year. The form reports total wages, wages subject to federal unemployment tax (i.e. any compensation in excess of $7,000 to any employee), the FUTA tax liability for each quarter, any FUTA tax payments made in previous quarters, and any remaining balance due.
Should a quarterly payment be required for any particular quarter, that payment must be made via the federal tax deposit system, i.e. EFTPS, the Electronic Federal Tax Payment System.
Any required quarterly payment must be made by the end of the month following the end of the quarter, i.e. Quarter 1 payment is due April 30, Quarter 2 payment is due July 31, Quarter 3 payment is due October 31, and Quarter 4 payment is due January 31.
by: Wayne M Davies
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