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Everything You Need To Know About Form 940

It’s likely that many of the stereotypes we associate with income tax could have been spawned by IRS Form 940.  By itself, it’s fairly innocuous, but the deeper you dig without professional help and organization, the scarier it can be.  We’re going to take some time today to try to clear the air on Form 940 and make it easier to understand for business owners.

Understanding Your Filing Status

First of all, Form 940 exists to manage Federal and State Unemployment taxes.  In order to decide if a business must pay those taxes, the IRS uses one of three tests - a general test, household employees test, and farm workers employees test.  Under the general test, you're subject to FUTA tax on the wages you pay employees who aren't household or agricultural employees and must file Form 940.pdf, Employer's Annual Federal Unemployment (FUTA) Tax Return, for 2017 if:

  • You paid wages of $1,500 or more to employees in any calendar quarter during 2016 or 2017, or
  • You had one or more employees for at least some part of a day in any 20 or more different weeks in 2016 or 20 or more different weeks in 2017. Count all full-time, part-time, and temporary employees. However, if your business is a partnership, don't count its partners.

The rules for household employees is really more about accounting - If you didn't report employment taxes for household employees on Forms 941, 943, or 944, report FUTA tax for these employees on Schedule H (Form 1040) and use an EIN. 
Form 940 and agricultural employees require employers to pay FUTA tax if you meet either of the following tests.

  • You paid cash wages of $20,000 or more to farm workers in any calendar quarter during the current or preceding calendar year.
  • You employed 10 or more farm workers for some part of at least 1 day (whether or not all at the same time) during any 20 or more different calendar weeks during the current or preceding calendar year.

Clear as mud, isn’t it?  Well, let’s take some of the pain out of Form 940…

Instructions for Form 940


The most important thing to understand is that filing Form 940 isn’t optional if you have employees.  As such, your responsibility is to pay 6% as a tax on the first $7,000 you paid in wages to each employee.  This represents a national average – some states and their own financial relationship to the United States government will require a slightly different amount, a credit of 5.4% may apply when filing form 940 which would mean your Futa tax rate would decrees to 0.6%, but that is in the realm of the preparer and the CPA, not you, as a business owner. 

If you’re brave enough to do it yourself, then you’ll simply place an “X” in each applicable state in which your company paid wages, calculate the percentages based on that states’ credit reduction status and the total wages paid, and total those sums.  The good news is that, in this case, the actual instructions on Form 940 are fairly clear.
Here’s where the fun starts.  The calculations for payment on Form 940 can get a little vague.
FUTA taxes are due by January 31st each year, but, as an employer, you’re responsible for payment of any balances owed quarterly.  If the balance owed is less than $500, you don’t have to pay that quarter – once the balance exceeds $500, you’ll have to pay at that time. 

Avoiding Penalties


As with any tax liability, the key to avoiding problems and penalties is to keep up with your payments and pay the taxes when they are due.  The IRS, as always, penalties for late deposits and late filing unless you show reasonable cause for the delay. If you do file late, attach an explanation to the return. There are also penalties for willful failure to pay tax, keep records, make returns, and filing false or fraudulent returns.

The best solution, as always, is to make sure that your small business handles and documents all your financial activities through proper bookkeeping channels.
 

 

By: Chris Groote

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