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Instructions for Form 940 2006 Tax Year

General Instructions: Understanding Form 940

This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Table of Contents

What's the Purpose of Form 940?

Use Form 940 to report your annual Federal Unemployment Tax Act (FUTA) tax. Together with state unemployment tax systems, the FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only employers pay FUTA tax. Do not collect or deduct FUTA tax from your employees' wages.

The FUTA tax applies to the first $7,000 you pay to each employee during a calendar year after subtracting any exempt payments.

These instructions give you some background information about the Form 940. They tell you who must file the form, how to fill it out line by line, and when and where to file it.

Who Must File Form 940?

Except as noted below, if you answer “Yes” to either one of these questions, you must file Form 940:

  • Did you pay wages of $1,500 or more to employees in any calendar quarter during 2005 or 2006?

  • Did you have one or more employees for at least some part of a day in any 20 or more different weeks in 2005 or 20 or more different weeks in 2006? Count all full-time, part-time, and temporary employees. However, if your business is a partnership, do not count its partners.

If your business was sold or transferred during the year, each employer who answered “Yes” to at least one question above must file Form 940. However, do not include any wages paid by the predecessor employer on your Form 940 unless you are a successor employer. For details, see b. Successor employer under Type of Return on page 5.

If you received a preprinted Form 940 and are not liable for FUTA tax for 2006 because you made no payments to employees in 2006, check box c in the top right corner of the form. Then go to Part 7, sign the form, and file it with the IRS.

If you will not be liable for filing Form 940 in the future because your business has closed or because you stopped paying wages, check box d in the top right corner of the form. See d. Final... under Type of Return on page 5 for more information.

For employers of household employees . . .

If you are a household employer, you must pay FUTA tax on wages that you paid to your household employees only if you paid cash wages of $1,000 or more in any calendar quarter in 2005 or 2006.

A household employee performs household work in a:

  • private home,

  • local college club, or

  • local chapter of a college fraternity or sorority.

    Generally, employers of household employees must file Schedule H (Form 1040), Household Employment Taxes, instead of Form 940.

However, if you have other employees in addition to household employees, you can choose to include the FUTA taxes for your household employees on the Form 940 instead of filing Schedule H (Form 1040). If you choose to include household employees on your Form 940, you must also file Form 941, Employer's QUARTERLY Federal Tax Return, Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, or Form 944, Employer's ANNUAL Federal Tax Return, to report social security, Medicare, and withheld federal income taxes for your household employees.

See Pub. 926, Household Employer's Tax Guide, for more information.

For agricultural employers . . .

File Form 940 if you answer “Yes” to either of these questions:

  • Did you pay cash wages of $20,000 or more to farmworkers during any calendar quarter in 2005 or 2006?

  • Did you employ 10 or more farmworkers during some part of the day (whether or not at the same time) during any 20 or more different weeks in 2005 or 20 or more different weeks in 2006?

To answer these questions, count wages you paid to aliens who were admitted to the United States temporarily to perform farmwork (these workers are also known as workers with H-2(A) visas). However, wages paid to “H-2(A) visa workers” are not subject to FUTA tax.

See Pub. 51 (Circular A), Agricultural Employer's Tax Guide, for more information.

For Indian tribal governments . . .

Services rendered to a federally recognized Indian tribal government employer (including any subdivision, subsidiary, or wholly owned business enterprise) after December 20, 2000, are exempt from FUTA tax and no Form 940 for 2006 is required. However, the tribe must have participated in the state unemployment system for the full year and be in compliance with applicable state unemployment law. For more information, see section 3309(d).

For tax-exempt organizations . . .

Religious, educational, scientific, charitable, and other organizations described in section 501(c)(3) and exempt from tax under section 501(a) are not subject to FUTA tax and do not have to file Form 940.

For employers of state and local government employees . . .

Employers of state and local government employees are not subject to FUTA tax and do not have to file Form 940.

When Must You File Form 940?

The due date for filing Form 940 for 2006 is January 31, 2007. However, if you deposited all your FUTA tax when it was due, you may file Form 940 by February 12, 2007.

If we receive your return after the due date, we will treat your return as if you filed it on time if the envelope containing your return is properly addressed, contains sufficient postage, and is mailed First Class or sent by an IRS-designated private delivery service by the due date. However, if you do not follow these guidelines, we will consider your return filed when it is actually received. For a list of IRS-designated private delivery services, see Pub. 15 (Circular E).

Where Do You File?

Where you file depends on whether you include a payment (check or money order) with your return. However, mail your amended return to the Without a payment address even if a payment is included.

If you are in . . . Without a
payment . . . 		With a payment . . .
EXCEPTION for tax-exempt organizations, Federal, State and Local Governments, and Indian Tribal Governments, regardless of your location IRS
Ogden, UT
84201-0046 		IRS
P.O. Box 105078
Atlanta, GA 30348-5078
Connecticut
Delaware
District of Columbia
Illinois
Indiana
Kentucky
Maine
Maryland
Massachusetts
Michigan
New Hampshire 		New Jersey
New York
North Carolina
Ohio
Pennsylvania
Rhode Island
South Carolina
Vermont
Virginia
West Virginia
Wisconsin 		IRS
Cincinnati, OH
45999-0046 		IRS
P.O. Box 1269
Charlotte, NC
28201-1269
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Florida
Georgia
Hawaii
Idaho
Iowa
Kansas
Louisiana
Minnesota
Mississippi 		Missouri
Montana
Nebraska
Nevada
New Mexico
North Dakota
Oklahoma
Oregon
South Dakota
Tennessee
Texas
Utah
Washington
Wyoming 		IRS
Ogden, UT
84201-0046 		IRS
P.O. Box 105078
Atlanta, GA
30348-5078
Puerto Rico
U.S.Virgin Islands 		IRS
Ogden, UT
84201-0046 		IRS
P.O. Box 105174
Atlanta, GA
30348-5174
If the location of your legal residence, principal place of business, office, or agency is not listed . . . IRS
P.O. Box 409101
Ogden, UT 84409 		IRS
P.O. Box 105274
Atlanta, GA 30348-5274

Caution
Private delivery services cannot deliver to P.O. boxes. You must use the U.S. Postal Service to mail an item to a P.O. box address.

Credit for State Unemployment Tax Paid to a State Unemployment Fund

You get a credit for amounts you pay to a state (including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands) unemployment fund by January 31, 2007 (or February 12, 2007, if that is your Form 940 due date.) Your FUTA tax will be higher if you do not pay the state unemployment tax timely. See the line 10 instructions on page 7, if you did not pay all state unemployment tax by the due date of Form 940.

State unemployment taxes are sometimes called “contributions.” These contributions are payments that a state requires an employer to make to its unemployment fund for the payment of unemployment benefits. They do not include:

  • any payments deducted or deductible from your employees' pay;

  • penalties, interest, or special administrative taxes; and

  • voluntary amounts you paid to get a lower assigned state experience rate.

Additional credit.   You may receive an additional credit if you have a state experience rate lower than 5.4% (.054). This applies even if your rate varies during the year. This additional credit is the difference between your actual state unemployment tax payments and the amount you would have been required to pay at 5.4%. See the Worksheet on page 8.

Special credit for successor employers.   You may be eligible for a credit based on the state unemployment taxes paid by a predecessor. You may claim this credit if you are a successor employer who acquired a business in 2006 from a predecessor who was not an employer for FUTA purposes and, therefore, was not required to file Form 940 for 2006. See section 3302(e). You can include amounts paid by the predecessor on the Worksheet on page 8 as if you paid them. For details on successor employers, see b. Successor employer under Type of Return, on page 5. If the predecessor was required to file Form 940, see the line 5 instructions on page 6.

When Must You Deposit Your FUTA Tax?

Although Form 940 covers a calendar year, you may have to deposit your FUTA tax before you file your return. If your FUTA tax is more than $500 for the calendar year, you must deposit at least one quarterly payment.

You must determine when to deposit your tax based on the amount of your quarterly tax liability. If your FUTA tax is $500 or less in a quarter, carry it over to the next quarter. Continue carrying your tax liability over until your cumulative tax is more than $500. At that point, you must deposit your tax for the quarter. Deposit your FUTA tax by the last day of the month after the end of the quarter. However, if your tax for the next quarter is $500 or less, you are not required to deposit your tax again until the cumulative amount is more than $500.

Fourth quarter liabilities.   In years when there are credit reduction states, you must include liabilities owed for credit reduction with your fourth quarter deposit. If your FUTA tax for the fourth quarter (plus any undeposited amounts from earlier quarters) is more than $500, deposit the entire amount by January 31, 2007. If it is $500 or less, you can either deposit the amount or pay it with your Form 940 by January 31, 2007.

When To Deposit Your FUTA Tax

If your undeposited FUTA tax
is more than $500 on . . .* 		Deposit your tax by . . .
March 31 April 30
June 30 July 31
September 30 October 31
December 31 January 31
*Also, see the instructions for line 16 on page 10.

  
Tip
 If any deposit due date falls on a Saturday, Sunday, or legal holiday, you may deposit on the next business day.

How Do You Figure Your FUTA Tax Liability for Each Quarter?

You owe a FUTA tax of 6.2% (.062) on the first $7,000 of wages that you paid to each employee during the calendar year. Most employers receive a maximum credit of up to 5.4% (.054) against this FUTA tax. Every quarter, you must figure how much of the first $7,000 of each employee's annual wages you paid during that quarter.

Figure your tax liability

Before you can figure the amount to deposit, figure your FUTA tax liability for the quarter. To figure your tax liability, add the first $7,000 of each employee's annual wages you paid during the quarter, then multiply that amount by .008.

The .008 tax rate is based on your receiving the maximum credit against FUTA taxes. You are entitled to the maximum credit if you paid all state unemployment tax by the due date of your Form 940 or if you were not required to pay state unemployment tax during the calendar year due to your state experience rate.

Example.

During the first quarter, you have 3 employees: Employees A, B, and C. You paid $11,000 to Employee A, $2,000 to Employee B, and $4,000 to Employee C during the quarter.

To figure your liability for the first quarter, add the first $7,000 of each employee's wages:
  $7,000 Employee A's wages subject to FUTA tax
  2,000 Employee B's wages subject to FUTA tax
  + 4,000 Employee C's wages subject to FUTA tax
  $13,000 Total wages subject to FUTA tax for the first quarter
     
  $13,000 Total wages subject to FUTA tax for the first quarter
  x .008 Tax rate (based on maximum credit of 5.4%)
  $104 Your liability for the first quarter
     
In this example, you do not have to make a deposit because your liability is $500 or less for the first quarter. However, you must carry this liability over to the second quarter.

If any wages subject to FUTA tax are not subject to state unemployment tax, you may be liable for FUTA tax at a higher rate (up to 6.2%). For instance, in certain states, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits are excluded from state unemployment tax.

Example.

Employee A and Employee B are corporate officers whose wages are excluded from state unemployment tax in your state. Employee C's wages are not excluded from state unemployment tax. During the first quarter, you paid $11,000 to Employee A, $2,000 to Employee B, and $4,000 to Employee C.

  $ 9,000 Total FUTA wages for Employees A and B in 1 st quarter
  x .062 Tax rate
  $558 Your liability for the first quarter for Employees A and B
     
  $4,000 Total FUTA wages subject to state unemployment tax
  x .008 Tax rate (based on maximum credit of 5.4%)
  $32 Your liability for the first quarter for Employee C
     
  $558 Your liability for the first quarter for Employees A and B
  + 32 Your liability for the first quarter for Employee C
  $590 Your liability for the first quarter for Employees A, B, and C
In this example, you must deposit $590 by April 30 because your liability for the 1 st quarter is greater than $500.

How Must You Deposit Your FUTA Tax?

You may deposit your FUTA tax electronically by using EFTPS or by depositing your tax with an authorized financial institution (for example, a commercial bank that is qualified to accept federal tax deposits). The financial institution will send IRS a record of your payment to credit to your business account.

You may deposit your FUTA tax using EFTPS

To expedite your deposit and confirm that IRS has received your payment, you may choose to deposit your tax using EFTPS. To enroll, call 1-800-555-4477 or visit the EFTPS website at www.eftps.gov.

If your business is new, IRS will automatically pre-enroll you in EFTPS when you apply for an employer identification number (EIN). If you choose to deposit your tax using EFTPS, follow the instructions on your EIN package to activate your enrollment.

You may be required to use EFTPS.   In some cases, you may be required to deposit your tax using EFTPS. For instance, you must use EFTPS in 2007 if:

  • the total payments of your employment tax, excise tax, and corporate income tax were more than $200,000 for 2005; or

  • you were required to use EFTPS in 2006.

  
Caution
 To make your EFTPS payments on time, you must initiate the transaction at least 1 business day before the date the deposit is due.

  If you do not use EFTPS, use Form 8109, Federal Tax Deposit (FTD) Coupon, when you deposit your tax. Do not mail your payments directly to IRS. If you are required to use EFTPS and you use Form 8109 instead, you may be subject to a 10% penalty.

  If you are a new employer and would like to receive an FTD coupon booklet, call 1-800-829-4933. Please allow 5 to 6 weeks for delivery.

How Can You Avoid Penalties and Interest?

Penalties and interest are assessed at a rate set by law on taxes paid late, returns filed late or incorrectly, insufficient payments made, and failure to pay using EFTPS (when required).

You can avoid paying penalties and interest if you:

  • deposit or pay your tax when it is due, using EFTPS if required; and

  • file your completed Form 940 accurately and on time.

If you receive a notice about penalty and interest after you file this return, send us an explanation and we will determine if you meet reasonable-cause criteria. Do not attach an explanation when you file your Form 940.

How Can You Amend a Return?

You use the 2006 Form 940 to amend a return that you previously filed for 2006. If you are amending a return for a previous year, use the previous year's Form 940 (or Form 940-EZ).

Follow these steps:

  • Use a paper return to amend a Form 940 filed under a magnetic tape or an electronic filing program.

  • Check the amended return box in the top right corner of Form 940, page 1, box a. (For pre-2006 Forms 940 and 940-EZ, check the “Amended Return” box above Part I.)

  • Fill in all the amounts that should have been on the original form.

  • Sign the form.

  • Attach an explanation of why you are amending your return. For example, tell us if you are filing to claim credit for tax paid to your state unemployment fund after the due date of Form 940.

  • File the amended return using the Without a payment address under Where Do You File? on page 2.

Completing Your Form 940

Follow these guidelines to correctly fill out the form.

To help us accurately scan and process your form, please follow these guidelines:

  • Make sure your business name and EIN are on every page of the form and any attachments.

  • If you type or use a computer to fill out your form, use a 12-point Courier font, if possible.

  • Make sure you enter dollars to the left of the preprinted decimal point and cents to the right.

  • Do not use dollar signs or decimal points. Commas are optional.

  • You may choose to round your amounts to the nearest dollar, instead of reporting cents on this form. If you do choose to round, you must round all entries. To round, follow these steps: If the amount is $.49 or less, drop the cents and add nothing to the dollar figure. If the amount is between $.50 and $.99, increase the dollar figure by $1.00 and drop the cents. (For example, $1.49 becomes $1.00 and $2.50 becomes $3.00.) If you use two or more amounts to figure an entry on the form, use cents to figure the answer and round the answer only.

  • If you have a line with the value of zero, leave it blank.

Employer Identification Number (EIN), Name, Trade Name, and Address

Review your business information at the top of the form

If you pay a tax preparer to fill out Form 940, make sure the preparer shows your business name and EIN exactly as they appear on the preprinted form we sent you or as assigned by the IRS.

If you are using a copy of Form 940 that has your business name and address preprinted at the top of the form, check to make sure that the information is correct. Carefully review your EIN to make sure that it exactly matches the EIN assigned to your business by the IRS. If any information is incorrect, cross it out and type or print the correct information. See Tell us if you change your name or address below.

If you are not using a preprinted Form 940, type or print your EIN, name, and address in the spaces provided. You must enter your name and EIN here and on page 2. Enter the business (legal) name that you used when you applied for your EIN on Form SS-4, Application for Employer Identification Number. For example, if you are a sole proprietor, enter “Ronald Smith” on the Name line and “Ron's Cycles” on the Trade Name line. Leave the Trade Name line blank if it is the same as your Name.

Employer identification number (EIN).   The IRS monitors tax filings and payments by using a numerical system to identify taxpayers and to make sure that businesses comply with federal tax laws. A unique 9-digit EIN is assigned to all corporations, partnerships, and some sole proprietors. Businesses that need an EIN must apply for a number and use it throughout the life of the business on all tax returns, payments, and reports.

  Your business should have only one EIN. If you have more than one and are unsure which one to use, call 1-800-829-4933 to verify your correct EIN.

  If you do not have an EIN, apply for one by:

  • Visiting the IRS website at www.irs.gov/smallbiz and filling out Form SS-4,

  • Calling 1-800-829-4933 and applying by telephone, or

  • Writing to the address on Form SS-4.

  If you do not have an EIN by the time a return is due, write “Applied For” and the date you applied in the space shown for the EIN on pages 1 and 2 of your return.

  
Tip
 Always be sure the EIN on the form you file exactly matches the EIN that IRS assigned to your business. Do not use a social security number or individual taxpayer identification number (ITIN) on forms that ask for an EIN. Filing a Form 940 with an incorrect EIN or using the EIN of another's business may result in penalties and delays in processing your return.

Tell us if you change your name or address

Notify the IRS immediately if you change your business name or address.

  • If your business name changes, write to the IRS office where you would send your return if you had no payment. See Where Do You File? on page 2. Also see Pub. 1635, Understanding Your EIN, for general information on EINs.

  • If your address changes, complete and mail Form 8822, Change of Address. Do not attach Form 8822 to your Form 940. Mail Form 8822 separately to the address indicated on Form 8822.

Type of Return

Review the box at the top of the form. If any line applies to you, check the appropriate box to tell us which type of return you are filing. You may check more than one box.

a. Amended. If this is an amended return that you are filing to correct a return that you previously filed, check box a.
b. Successor employer. Check box b if you are a successor employer and:
You are reporting wages paid before you acquired the business by a predecessor who was required to file a Form 940 because the predecessor was an employer for FUTA tax purposes, orYou are claiming a special credit for state unemployment tax paid before you acquired the business by a predecessor who was not required to file a Form 940 because the predecessor was not an employer for FUTA tax purposes.

    A successor employer is an employer who:

    Acquires substantially all the property used in a trade or business of another person (predecessor) or used in a separate unit of a trade or business of a predecessor, and Immediately after the acquisition, employs one or more people who were employed by the predecessor.

      c. No payments to employees in 2006. If you are not liable for FUTA tax for 2006 because you made no payments to employees in 2006, check box c. Then go to Part 7, sign the form, and file it with the IRS.
      d. Final: Business closed or stopped paying wages. If this is a final return because you went out of business or stopped paying wages and you will not be liable for filing Form 940 in the future, check box d. Complete all applicable lines on the form, sign it in Part 7, and file it with the IRS.

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