Owning and operating a business comes with a host of responsibilities, and among the most daunting are the IRS reporting requirements. For businesses that hire employees, these responsibilities expand even further.
Employers are accountable for withholding and depositing specific taxes from their employees’ wages to the IRS. When it comes to funding federal unemployment benefits, employers must contribute as well. Calculating FUTA taxes and completing Form 940 can be a complex process.
In this article, we provide an overview of Form 940, its associated filing requirements, and the latest IRS updates for the 2023 tax year.
What are FUTA (Federal Unemployment Tax Act) Taxes?
The Federal Unemployment Tax Act was established to bridge the financial gap for individuals during the period between job loss and securing new employment, guaranteeing access to unemployment benefits. In addition to paying into the fund, employers are required to report their FUTA taxes to the IRS.
Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return
This form is used to report the FUTA taxes that an employer is responsible for throughout the tax year. It is an annual IRS filing requirement for businesses that fall into one or both of the following categories:
If the employer paid $1500 in wages to employees in any quarter of the past 2 calendar years.
The employer had one or more full-time, part-time, or seasonal employees for at least part of a day in 20 or more different weeks in 2022 or in 2023. This doesn’t apply to businesses that are partnerships.
Employers are required to pay a FUTA tax rate of 6% on the first $7,000 of wages that is paid to each employee. Many states also require SUTA payments, this amount is paid into the federal unemployment fund which provides unemployment relief to unemployed workers.
Employers that are required to pay SUTA taxes are able to reduce their FUTA taxes by up to 5.4% based on the state.
What is Form 940, Schedule A?
This is an attachment form that employers are required to complete if they have employees residing in multiple states, or they pay wages to employees that reside in a credit reduction state. Schedule A is used to help calculate the tax rates for these employers so they can accurately report this information to the IRS.
What is a Credit Reduction State?
If a state goes through its allotted unemployment fund, it is able to take out a loan from the federal government to continue making payments to unemployed residents. The IRS requires the states that take a loan to repay it within two years. If the state still has a balance due at the end of the second year, they will be subject to credit reduction.
Employers are able to reduce their FUTA taxes by a rate of up to 5.4% depending on the state. Therefore, employers in credit reduction states are not able to reduce the entire 5.4%. They must offset this amount depending on the credit reduction rate of their state.
How are Credit Reduction States Determined?
The Department of Labor determines states with outstanding balances and establishes the credit reduction rate based on the duration of their outstanding balance. The rate starts at .3% and is typically increased for each year that the balance remains by an additional 3%.
What are the projected Credit Reduction States for 2023?
These are the projected Credit Reduction States for the 2023 tax year and their reduction rates:
Key Takeaways: What are the Updates to Form 940 for 2023?
Once finalized by the IRS, the credit reduction states and their rates will affect both employers and residents of these states.
These rates will affect how employers that have employees in credit reduction states calculate their FUTA taxes and report them on 940 and 940 Schedule A.
General IRS Update: All businesses that file 10 or more information returns with the IRS in a calendar year will be required to file 940 electronically rather than filing paper copies. This is a result of the IRS drastically reducing the thresholds for e-filing.
Simplify your 940 Filing with TaxBandits!
TaxBandits is an IRS-authorized e-file provider that simplifies Form 940, Form 941, and other 94x form filings. It offers a wide range of features that make the filing experience easy, secure, and accurate.
You can easily complete and attach Schedule A as needed to meet the 940 deadline on January 31, 2024. Take advantage of bulk upload options and built-in audit feature that checks your form for errors using the IRS Business Rules.
Create your free TaxBandits account today to begin your Form 940, and other IRS filing requirements such as Form W-2, 1099 Form, 1095, and the quarterly 941.