How to Complete Form 940 for Federal Unemployment Taxes
One of your responsibilities as an employer is to pay unemployment taxes so that employees may have unemployment benefits if they are terminated from employment. Employment insurance taxes are collected by the IRS and by states.
Employees do not have to pay unemployment tax; the tax is based on the gross pay of your employees each payday. You will need to set aside an amount each payday and pay the tax when due. You must also submit an annual report on the amounts of unemployment tax due and paid. That report is IRS Form 940.
Employers must pay unemployment tax (FUTA Tax), based on employee wages/salaries and must submit Form 940–Federal Employer Unemployment (FUTA) Tax Return showing the amount of unemployment tax owed for the previous year, the amount already paid, and the amount owed.
Form 940 is due on January 31 each year for the previous year. If the amount of federal unemployment tax due for the year has been paid, the Form 940 due date is February 11 (in 2019, for 2018).
Form 940 and State Unemployment Taxes
The standard FUTA tax rate is 6 percent on the first $7,000 of wages subject to FUTA tax. This 6 percent is then reduced by 5.4 percent to give a credit to the state where you do business for the state's unemployment taxes. So the federal FUTA tax is 0.6 percent.
Some states take out loans against their federal FUTA tax credit. If a state does not repay these loans in a timely manner, their FUTA tax credit is reduced. For example, a state might have a credit reduction of 0.3 percent, which means that your business FUTA credit would be only 5.1 percent, and you would have to pay the additional 0.3 percent to get to the 6 percent FUTA tax rate.
Read this article from the IRS on FUTA Credit Reduction.
What You Will Need to Complete Form 940
Completing Form 940 is straightforward once you have gathered the information required. The only part that might not be clear is the sections relating to the interaction between state unemployment taxes and the federal unemployment program.
First, you will need information about your company: Employer Identification Number, name, trade name, and address of your company.
Part 1 of Form 940 requires three responses concerning state unemployment taxes:
1a. Enter the state abbreviation for your state if you had to pay state unemployment tax in only one state.
1b. If you are a multi-state employer, you must complete Schedule A for Form 940, which lists each state where you have employees and includes FUTA taxable wages for that state, a reduction rate, the credit reduction for that state, and a total credit reduction.
2. You must also complete Schedule A for Form 940 if you paid wages in a state that is subject to credit reduction (see the explanation above). At this writing, only California and the Virgin Islands are subject to credit reduction but check with your state taxing department to be sure.
Wages Included in FUTA Tax Calculation
The IRS says FUTA taxes are calculated on employee "wages," but this is vague. FUTA tax calculations are most payments to employees, but there are many exceptions. Mileage reimbursements, insurance premiums, and other fringe benefits are not included, but moving expenses and bicycle commuting reimbursements are.
Form 940 Calculation
Part 2 of Form 940 determines your FUTA tax before adjustments. You will need the following information:
- The total payments to all employees for the calendar year.
- The total amount of payments exempt from FUTA tax and the source of those payments. These exempt payments might include some fringe benefits, group life insurance, and retirement plan benefits.
- The total of payments made to all employees in excess of $7,000 for the year.
Subtract 2. and 3. from 1. to get the total FUTA taxable wages. Then, multiply by 0.008 (.8 percent) to get the total FUTA tax owed.
Part 3 of Form 940 calculates adjustments for state unemployment taxes including credit reductions. If you paid into one or more eligible state unemployment funds, you should adjust the amount owed to federal unemployment.
Part 4 calculates any balance due or underpayments for the previous year.
Part 5 reports your tax liability by the quarter if the yearly amount is more than $500.
Part 6 requests information on a third-party designee (employee, paid tax preparer, or another person) who can speak for your business in this matter.
Part 7 requires your signature. Remember that you are affirming that everything is true and correct in this document.
When you have determined the amount of FUTA tax owed, you must show how much has already been paid and how much is still owed. You are responsible for paying the amount still due, at the time you submit the Form 940.
If you have further questions about how to complete IRS Form 940, see the IRS Instructions for Form 940.