File Form 940: A Simple Guide to FUTA Tax Returns

File Form 940: A Simple Guide to FUTA Tax Returns

As an employer, one of your key responsibilities is ensuring that your business complies with federal tax requirements. Among these, the Federal Unemployment Tax Act (FUTA) tax is an essential part of payroll taxes that must be reported and paid annually. Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, is the form used to report and pay this tax.

In this guide, we’ll walk you through the process of filing Form 940, explain the FUTA tax requirements, and provide you with a comprehensive overview of the steps you need to follow to ensure compliance.

What is FUTA Tax?

The Federal Unemployment Tax Act (FUTA) tax is a federal payroll tax that employers must pay to fund unemployment compensation programs at the federal level. This tax is not deducted from employee wages; instead, it’s a tax that employers must pay based on the wages they pay to their employees.

The FUTA tax rate is currently 6% of the first $7,000 in wages paid to each employee during the year. However, employers may qualify for a credit of up to 5.4% for paying state unemployment taxes, reducing the effective FUTA tax rate to as low as 0.6%.

Who Must File Form 940?

You are required to file Form 940 if you are an employer who meets any of the following criteria:

1. Paid $1,500 or more in wages in any calendar quarter during the year.
2. Had one or more employees for at least 20 weeks during the year (these don’t have to be consecutive weeks).

If you are an employer who has met either of these conditions, you must file Form 940 and pay FUTA tax. Even if you don’t owe any FUTA tax because you qualify for the full credit, filing is still required.

Key Information to Gather Before Filing Form 940

Before you begin filling out Form 940, make sure you have the following information:

• Your Employer Identification Number (EIN): This is a unique number assigned to your business by the IRS for tax purposes.
• Total wages paid to employees: This includes all wages subject to FUTA tax, up to the first $7,000 per employee.
• State unemployment tax information: You need details on the state unemployment tax rate and any credits you’re eligible to claim for state taxes paid.
• Any previous FUTA tax payments: If you’ve made any estimated payments for FUTA tax throughout the year, you’ll need this information when filing.

Steps to File Form 940

1. Complete Basic Information

   • Provide your business name, address, and Employer Identification Number (EIN) at the top of Form 940.

2. Calculate Total Wages Subject to FUTA

   • In Part 1, report the total wages subject to FUTA tax for each employee during the year, up to $7,000 per employee.

3. Determine the FUTA Tax

   • Multiply the total FUTA taxable wages by 0.6% (after applying the state tax credit) to calculate the amount of FUTA tax due. This calculation should be reported in Line 10 of Form 940.

4. Claim State Tax Credits

   • If your business paid state unemployment taxes, you may be eligible to claim a credit to reduce your FUTA tax liability. Enter the amount of the state unemployment tax you’ve paid on Line 11 and calculate the credit on Line 12. The maximum credit is 5.4%, reducing the FUTA tax rate to 0.6%.

5. Adjust for Any Payments Made

   • If you made estimated FUTA tax payments throughout the year, report these payments in Part 2 of Form 940. This will help you determine if you owe any additional taxes or are entitled to a refund.

6. Sign and Submit the Form

   • Once you’ve completed the form, sign it and date it to verify the accuracy of the information. The form must be submitted to the IRS by mail or electronically, depending on your preference.

FUTA Tax Payment Deadlines

Form 940 is due January 31st of the year following the year for which the tax is being reported. For example, for the 2024 tax year, Form 940 is due by January 31, 2025.

However, if you owe more than $500 in FUTA tax, you must make quarterly payments throughout the year. If you owe $500 or less, you can carry that balance over to the next year’s tax return.

• Quarterly payments for FUTA taxes are due on:
  • April 30 (for Q1)
  • July 31 (for Q2)
  • October 31 (for Q3)
  • January 31 (for Q4, and also for your annual filing if you owe more than $500)

If your total FUTA tax due is less than $500, you do not need to make quarterly payments. You will only pay the total amount when you file Form 940 by the January 31st deadline.

Common Mistakes to Avoid When Filing Form 940

1. Not Filing on Time

   • Failing to file by the due date or missing the quarterly payment deadlines can result in penalties and interest charges. Ensure your filing is timely to avoid these costs.

2. Incorrect Calculation of Wages

   • Ensure you only report wages that are subject to FUTA tax, which is limited to $7,000 per employee. You should exclude wages over this amount for each employee.

3. Failure to Claim State Tax Credit

   • If your state’s unemployment tax is paid in full, be sure to claim the 5.4% credit to reduce your effective FUTA tax rate. Failing to do so means you might overpay FUTA tax.

4. Misreporting Employee Counts

   • Ensure that you correctly report the number of employees you had during the year. The number of employees is a critical factor in determining your filing requirements.

Paying Your FUTA Tax

After completing Form 940, you may need to make a payment for any FUTA tax due. Payments are made to the U.S. Treasury, and you can pay online through the Electronic Federal Tax Payment System (EFTPS) or by check.

If you’re unsure of the amount owed, review the calculations on Form 940 to confirm the correct amount due. Failure to make timely payments can result in penalties and interest.

Conclusion

Form 940 is essential for employers who meet the criteria for FUTA tax payments. Filing the form on time and accurately can help you avoid penalties and ensure that your business complies with federal unemployment tax laws.