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940 Annual Processing

Overview

Form 940 (Employer's Annual Federal Unemployment Tax Return) reports Federal Unemployment Tax Act (FUTA) taxes on the first $7,000 of wages paid to each employee during the year. ProPay automates Form 940 calculations and supports both electronic filing and paper returns.

What Is Form 940 E-file?

A 940 E-File is an XML file containing all information typically found in a paper Form 940. Like Form 941, the E-File system is detailed in IRS Publication 3823. ProPay handles the technical aspects of XML file creation, making the e-filing process straightforward.

Benefits of E-Filing Form 940

  • Annual convenience - File once per year instead of quarterly
  • Automatic calculations - ProPay tracks FUTA wage limits throughout the year
  • IRS acknowledgment - Immediate confirmation of receipt
  • Integrated with 941 filing - Use the same credentials and process

FUTA Tax Calculation

ProPay automatically calculates FUTA tax based on:

  • Wage base limit - First $7,000 per employee per year
  • Standard FUTA rate - 6.0% on taxable wages
  • State credit - Up to 5.4% credit for state unemployment taxes paid on time
  • Effective rate - Typically 0.6% (6.0% - 5.4% state credit)

Credit Reduction States

Some states have outstanding federal unemployment insurance loans and are subject to credit reduction. ProPay handles credit reduction calculations automatically. You can see credit reduction information in the XML file:

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Setting Up Form 940 E-filing

Form 940 e-filing uses the same setup as Form 941. If you have already configured 941 e-filing, you're ready to file Form 940 electronically.

IRS Registration Requirements

When completing Form 8655 (Reporting Agent Authorization):

  1. Enter the first tax year (YYYY) you will start e-filing for Form 940
  2. Have your client (the taxpayer) sign and date the form
  3. Submit to the IRS by fax (855-214-7523) or mail

System Setup

  1. Click Client Functions
  2. Select Setup
  3. Choose System Setup
  4. Click Electronic
  5. Verify your 940 E-File credentials are entered

Filing Form 940 Electronically

Creating the E-File

  1. Click Client Functions
  2. Select Electronic Processing
  3. Choose Magnetic Media
  4. Click Federal Quarterly 941/940/944 Filing
  5. Select the clients to include
  6. Choose the year-end period
  7. ProPay creates an XML file containing Form 940 data

Test Files

Before submitting production files:

  1. Create a test file using a company with Federal ID starting with "00"
  2. Submit the test file to the IRS
  3. Wait for IRS approval before submitting production files

Production Filing

Once your test file is approved:

  1. Create the production file for all clients
  2. Print the internal report for your records
  3. View the Mag Media File to verify at least one client's data
  4. Compare the file with a printed copy of Form 940
  5. Click Upload File
  6. Log in to the IRS website and upload the file

IRS Acknowledgment

After transmission:

  • The IRS sends an acknowledgment file
  • ProPay stores the acknowledgment for your records
  • You can access acknowledgment files to verify successful filing
  • Provide copies to clients as proof of filing

Year-end 940 Adjustments

When Adjustments Are Needed

You may need to generate a 940 tax payment for year-end adjustments if:

  • Line 10 of Form 940 shows adjustments
  • Credit reduction states require additional payment
  • There are corrections to previously reported wages
  • You have a balance due after reconciliation

How to Generate a 940 Adjustment Payment

If you have a balance due on Form 940 because of adjustments on line 10:

  1. Click Taxes
  2. Select Tax File
  3. Click Add
  4. Enter the following:
    • Tax Type: 940
    • Pay Date: Last pay date of the year (12/31/[year])
    • Amount: Balance due from Form 940 line 14
    • Due Date: January 31 of the following year (or next business day if it falls on a weekend/holiday)
    • Check/Payment Type: Choose Paper Check, EFTPS, or ACH based on employer preference
    1. Click Save

    Force Generation of Tax Payment

    After adding the adjustment entry:

    1. Click Paychecks
    2. Select Print Checks (for Selected Employees)
    3. Enter the last pay date of the year
    4. Click Continue
    5. Do not select any employees
    6. Click Continue again
    7. The program will prompt you to print Tax checks or generate Electronic Tax Payments
    8. Proceed with the selected payment method

    This process forces ProPay to generate the 940 adjustment payment without printing employee paychecks.

    940 Tax Liability Throughout the Year

    Automatic Tracking

    ProPay tracks FUTA liability throughout the year:

    • Calculates FUTA tax on each paycheck up to the $7,000 wage limit per employee
    • Stops calculating FUTA tax once an employee exceeds the wage base
    • Accumulates total annual FUTA liability

    When FUTA Payments Are Due

    Quarterly Deposits Required If: Your FUTA tax liability exceeds $500 in any calendar quarter. Deposit by the last day of the month following the quarter end.

    Annual Payment Allowed If: Your total annual FUTA tax is $500 or less. Pay with Form 940 by January 31 of the following year.

    Tax Impounds for FUTA

    If you use the ACH-CREDIT method with a Payroll Processor:

    • ProPay impounds FUTA taxes throughout the year
    • FUTA taxes are included in regular tax impound calculations
    • The Payroll Processor holds funds in escrow until payment is due
    • Payment is made when the quarterly threshold is reached or at year-end

    Viewing 940 Data in XML Files

    ProPay generates XML files with structured 940 data. You can view these files using XML Copy Editor or any XML viewer.

    Sample Form 940 XML Structure

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    Important: Do not edit XML files. Use them for viewing and validation purposes only. Editing may cause errors in submission.

    Common 940 Filing Issues

    Issue: FUTA Wages Don't Match Expectations

    Solution:

    1. Verify employee wage records
    2. Check that the $7,000 wage base limit is correctly applied
    3. Review exempt wage classifications (some wages may be exempt from FUTA)
    4. Ensure prior quarter adjustments are accounted for

    Issue: Credit Reduction State Calculations

    Solution:

    1. Verify the state is subject to credit reduction for the tax year
    2. Check IRS announcements for credit reduction states
    3. Ensure ProPay has current credit reduction rates
    4. Review Schedule A of Form 940 for accuracy

    Issue: Balance Due at Year-End

    Solution:

    1. Review quarterly FUTA deposits made during the year
    2. Check for late state unemployment tax payments (affects FUTA credit)
    3. Verify credit reduction amounts
    4. Use the year-end adjustment process to generate the final payment

    Year-end Filing Deadlines

    Form 940 Due Date: January 31 of the following year

    Extended Deadline: February 10 if you deposited all FUTA tax when due

    Payment Deadline: If you have a balance due, payment must accompany Form 940 by January 31 (or be made electronically by that date)

    Additional Resources

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