Form 940 Filing Tips for Sole Proprietors Who Hire Employees

✅ What Is Form 940?

Form 940, officially titled the Employer’s Annual Federal Unemployment (FUTA) Tax Return, is used to report your liability for FUTA taxes. Unlike Social Security or Medicare taxes, FUTA is paid entirely by the employer—not withheld from employee wages.

🧾 Do Sole Proprietors Need to File Form 940?

If you’re a sole proprietor and meet either of the following conditions, you must file Form 940:

• You paid $1,500 or more in wages to employees in any calendar quarter, OR
• You had at least one employee working any part of a day in 20 or more different weeks during the year.

💡 Filing Tips for Sole Proprietors

1. Know Your Due Dates

Form 940 is due by January 31 each year. If your FUTA tax liability exceeds $500 in a quarter, deposits must be made quarterly via EFTPS.

2. Claim Your State Unemployment Credit

If you pay your state unemployment taxes in full and on time, you may qualify for a credit of up to 5.4%, which reduces your effective FUTA tax rate to just 0.6%.

3. Only the First $7,000 Counts

FUTA taxes apply only to the first $7,000 of an employee’s annual wages. This threshold resets each year per employee.

4. Report Accurately

Keep detailed payroll records, including wages paid, unemployment insurance paid to the state, and any exceptions. Accuracy matters to avoid IRS notices.

5. Don’t Confuse FUTA with FICA

FUTA is different from FICA (Social Security and Medicare) taxes. Sole proprietors must be aware of all payroll obligations and file the appropriate forms (e.g., 941, W-2, W-3) if applicable.

📌 Common Mistakes to Avoid

• ❌ Missing the deadline
• ❌ Miscalculating the FUTA liability
• ❌ Ignoring state unemployment credits
• ❌ Forgetting to make required quarterly deposits

📋 How to File Form 940

1. Gather your payroll and wage information for all employees.
2. Determine your total FUTA liability.
3. Apply the state unemployment credit (if applicable).
4. Download and complete Form 940.
5. Submit the form electronically or mail it to the IRS address for your location.

🧮 Example Calculation

If you paid an employee $9,000 in 2025:

• Only the first $7,000 is subject to FUTA.
• Tax without credit: 6% × $7,000 = $420
• Tax with full credit: 0.6% × $7,000 = $42

📌 Final Thoughts

Filing Form 940 is a vital responsibility for sole proprietors with employees. Being diligent about reporting and tax deposits helps you stay compliant and avoid IRS scrutiny. Whether you manage payroll yourself or outsource to a provider, ensure FUTA obligations are being met.

For help navigating Form 940 and other employer tax forms, consult a qualified tax professional who understands small business compliance in the U.S.