Form 940-Schedule R: Allocation Schedule for Aggregate Form 940 Filers

Form 940 Schedule R: Allocation Schedule for Aggregate Form 940 Filers Explained

When filing Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return), certain employers—those that file multiple Form 940 returns as part of a group or aggregate filing—are required to use Schedule R to allocate their federal unemployment tax (FUTA) liability. Form 940 Schedule R is a crucial tool for employers who are part of a related group of corporations or entities, ensuring that their FUTA tax is correctly allocated across the group.

In this guide, we will provide a clear and easy-to-follow explanation of Form 940 Schedule R, including who needs to file it, how to complete it, and common mistakes to avoid.

What is Form 940 Schedule R?

Form 940 Schedule R is used by employers who are part of a related group of corporations or entities to allocate the FUTA tax liability between the entities. These employers must file Form 940 for each member of the group, but the FUTA tax is calculated on an aggregate basis across all the entities in the group. Schedule R helps allocate the FUTA tax liability among the entities based on their respective share of the total wages paid.

This allocation ensures that the group files and reports FUTA tax liabilities correctly and prevents over- or under-reporting of the tax.

Who Needs to File Form 940 Schedule R?

Schedule R is required for employers who:

1. File Aggregate Form 940 Returns:
   You must file Schedule R if you are part of a group of related employers and are filing aggregate returns under Form 940. This includes corporations or other entities that are linked together through common ownership or control.

2. Have Multiple Entities Within the Group:
   Each entity in the group must have its own Form 940 filed, but the tax liability must be calculated and allocated across all entities based on their payroll contributions. If you have multiple businesses under common ownership, Schedule R helps ensure the correct allocation.

3. Qualify for Aggregate Reporting:
   If the businesses in the group meet the IRS requirements for aggregate reporting, they can use Schedule R to allocate the total FUTA tax liability among the group. This is typically for larger organizations that manage multiple locations or operations under one ownership umbrella.

Key Information You’ll Need to Complete Schedule R

To complete Form 940 Schedule R, you’ll need the following details:

• Employer Identification Numbers (EINs) for each business in the group.
• Total wages paid by each entity in the group.
• Total FUTA wages subject to tax for each business.
• The federal unemployment tax (FUTA tax) liability for each business.
• Total group FUTA tax liability and its allocation between the entities.

How to Complete Form 940 Schedule R

Step 1: Provide Basic Group Information
In the first section of Schedule R, provide general information about the group of employers filing together, including:

• The EIN for each business in the group.
• The total FUTA tax liability for each entity.

Step 2: Report the Total Wages
For each employer in the group, report the total wages paid that are subject to FUTA tax. This amount is $7,000 per employee (subject to FUTA tax) for the year.

Step 3: Allocate the Tax Liability
In the allocation section of Schedule R, divide the FUTA tax liability based on the wages paid by each employer in the group. This allocation is done proportionally based on each entity’s share of the group’s total wages. The more wages an employer pays, the larger share of the total FUTA liability they will bear.

For each employer, calculate the amount of FUTA tax based on its share of the total wages paid by the group.

Step 4: Complete the Form 940
After filling out Schedule R, use the allocated amounts to complete Form 940 for the group. Each entity in the group will report the allocated amount of FUTA tax, and the group will file aggregate Form 940 returns.

Step 5: File the Form
Once you’ve completed both Form 940 and Schedule R, file the forms according to the IRS submission guidelines, which include submitting them electronically or by mail by the January 31st deadline.

Important Filing Tips

1. Check the Eligibility for Aggregate Reporting:
   Make sure you qualify to use aggregate reporting for Form 940. If you are uncertain, consult with a tax professional to confirm whether your businesses can file jointly or if they should file separately.

2. Accurate Allocation of Tax Liability:
   Carefully calculate the correct allocation of FUTA tax liability based on the wages paid by each employer in the group. Ensure that you maintain accurate records of all wages and taxes paid for each business to avoid errors.

3. Track All Group Wages:
   Ensure that you track the total wages paid across all businesses in the group. Any mistakes in wage reporting or tax calculations could lead to penalties or discrepancies in the IRS records.

4. File on Time:
   The deadline for submitting Form 940 and Schedule R is January 31st of the following year. Ensure that you file on time to avoid penalties and interest charges.

5. Stay Updated on Wage Limits:
   The FUTA wage base may change over time. Be sure to keep up with any adjustments to the $7,000 wage limit for FUTA tax reporting to ensure your calculations are correct.

Common Mistakes to Avoid

1. Incorrectly Allocating FUTA Tax:
   An inaccurate allocation of the FUTA tax liability across businesses in the group can lead to incorrect filings and potential penalties. Double-check the tax amounts and wages reported for each entity.

2. Missed Deadline:
   Not filing Schedule R and Form 940 by the due date can result in penalties. Ensure you file before the January 31st deadline to avoid late fees.

3. Failure to Report All Wages:
   If you overlook any wages paid to employees within the group, it can affect the tax calculations. Ensure that all wages subject to FUTA tax are included in your reporting.

4. Not Consulting a Tax Professional:
   Given the complexities of aggregate reporting and tax allocation, consulting a tax professional is highly recommended to avoid mistakes, especially if your business structure is complex.