What is Form 940?
Form 940 is used to calculate a business' annual Federal Unemployment Tax Act (FUTA) tax. The money from this tax goes towards paying unemployment compensation for those that have lost their jobs. Because this tax is paid by the business, it is not deducted from employee's payrolls. Using the business' information from the previous calendar year, the form must be filled out and submitted by the end of February.
Is My Business Eligible?
The most important thing to consider when filling out this paperwork is if your business is even required to pay this tax. If the following two requirements are met, your business must pay this tax:
- The business must pay over $1,500 to its employees in any given calendar quarter
- The business must have had one or more employees working in some capacity for at least 20 weeks of the year
If it is found that paying the FUTA tax is required, one must then fill out the form. There are 7 sections of this form which determines the base FUTA tax along with any adjustments required.
Determining Your Base FUTA Tax
Part two of Form 940 determines the base amount the business must pay before any adjustments are made. Since the first $7,000 of each employee's income is taxable by the FUTA tax, all payments to all employees throughout the last calendar year must be listed. Certain payments and fringe benefits are exempt from this listing. Consult a tax professional to see if any of yours are. Once the sum is found, it is multiplied by the effective tax rate. The resulting product is the base FUTA tax.
Calculating FUTA Tax Adjustments
If the business's expenses were not SUTA taxable, or if the employer paid wages in a credit reduction state, certain adjustments can be made to the FUTA tax in order to adjust for these changes. If some of the FUTA wages were exempt from the state unemployment tax, or if any of the state unemployment taxes are going to be paid late, other adjustment must also be made.
The above steps are for a standard business tax reports. The American tax system is extremely complicated, however, and the aforementioned steps may change depending on a large variety of different circumstances. Please consult a tax professional if you are confused at any point while completing your taxes.