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, who distribute unemployment benefits to former employees.
Who Pays Unemployment Taxes?
Employees do not have to pay unemployment tax; the tax is based on the gross pay of your employees each payday.
Your business 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.
How and When to Pay Unemployment Taxes
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 10 to file. If either of these dates is a holiday or weekend, you have until the next business day to file. Check this month-by-month payroll tax calendar for the current year's due dates.
Form 940 and State Unemployment Taxes
The standard FUTA tax rate is 6% on the first $7,000 of wages subject to FUTA tax. This 6% is then reduced by up to 5.4% to give a credit to the state where you do business for the state's unemployment taxes. So the federal FUTA tax after the credit is applied is 0.6%. Generally, you're entitled to the maximum state credit if you paid your state unemployment taxes in full on time, and the state isn't determined to be a credit reduction state.
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%, which means that your business FUTA credit would be only 5.1%, and you would have to pay the additional 0.3% to get to the 6% FUTA tax rate.
At present, the only credit reduction state is the U.S. Virgin Islands. For more information, read this article from the IRS on FUTA Credit Reduction.
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.
In some states, the wages subject to state unemployment tax are different from wages subject to FUTA tax. Some states exclude some types of wages from FUTA tax (for example, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits). In these cases, you may have to deposit more than the 0.6% FUTA tax.
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.
Information about your business: Employer Identification Number, name, trade name, and address of your company.
Information to calculate FUTA Tax:
- Total payments to all employees for the calendar year
- Payments exempt from FUTA Tax (and categories)
Information to determine adjustments:
- Taxable FUTA wages excluded from state unemployment tax
Completing Form 940
Part 1 of Form 940 requires three responses concerning state unemployment taxes:
Line 1a. Enter the state abbreviation for your state if you had to pay state unemployment tax in only one state.
Line 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.
Line 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).
Part 2 of Form 940 determines your FUTA tax before adjustments.
Line 3. The total payments to all employees for the calendar year.
Line 4. Total payments exempt from FUTA Tax and the kind of payment.
Line 5. Total payments in excess of $7,000 for the year.
Line 6. Line 4 + Line 5.
Line 7. Total taxable FUTA Wages. Line 3 - Line 6.
Line 8. FUTA Tax line 7 x 0.006.
Here's a quick way to figure your FUTA tax liability for the year, with an example:
Multiply the FUTA tax cap of $7,000 x the tax rate of 0.060:
$7,000 x 0.060 = $420
Multiply the result times the number of employees (assuming all employees earn at least $7,000 for the year):
$420 x 8 employees = $3,360
That's your total FUTA liability in the first part of Form 940.
BUT, this amount may need to be adjusted considering your state's FUTA credit situation.
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.
Paying FUTA Taxes
You may need to pay your annual FUTA tax in one or more deposits during the year, depending on the amount you owe. Check the amount you owe for FUTA taxes before the end of each quarter.
If your FUTA tax liability is $500 or less in a quarter, carry it forward to the next quarter, making a deposit when your liability is $500 or more. You must make a deposit by the last day of the month after the end of the quarter.
if your total FUTA tax liability for the year is $500 or less, you can pay by deposit or with your Form 940 by January 31.
You must make FUTA deposits electronically, using the Electronic Federal Tax Payment System (EFTPS).
State unemployment taxes are complicated, and each state's laws are different. This article is a general overview, not detailed information on Form 940. Get help from a payroll service or from a tax professional to complete this form.
IRS. "Topic No. 759 Form 940 - Employer's Annual Federal Unemployment (FUTA) Tax Return - Filing and Deposit Requirements." Accessed May 14, 2020.
IRS. "Publication 15 (Circular E) Employer's Tax Guide." Page 36. Accessed May 14, 2020.
IRS. “Instructions for Form 940.” Page1. Accessed May 14, 2020.
IRS. "Publication 15 (Circular E) Employer's Tax Guide." Page 36. Accessed May 1, 2020.
IRS. "Form 940 Employer's Annual Federal Unemployment (FUTA) Tax Return." Accessed May 14, 2020.