Form 940: Everything You Need to Know
As an employer, you’re responsible for taking care of your workers and compensating them for their efforts. But you’re also responsible for contributing to the wellbeing of those who are unemployed.
Employers in the U.S. must pay a federal unemployment tax, which funds state workforce agencies that serve people who are jobless. The Federal Unemployment Tax Act (FUTA) authorizes the IRS to collect this tax to cover the cost of job service programs and unemployment insurance in all states.
The national unemployment rate fell to 3.9% in December 2018 after the creation of 312,000 jobs throughout the month, according the Bureau of Labor Statistics. The rate rose to 4.0% in January, though it remains among the lowest it has been in recent years. However, a significant number of Americans are still without work.
Read on to learn how to properly report your federal unemployment taxes to make sure you’re doing your part to support unemployment efforts.
What is Form 940?
Employers must file IRS Form 940 to report annual FUTA taxes. You’ll typically pay state unemployment taxes as well. FUTA tax and state tax combined provide unemployment compensation to workers who have lost their jobs.
The FUTA tax affects the first $7,000 in taxable wages that you pay each of your employees during a calendar year. The FUTA rate is 6% and applies to taxable income comprised of wages and salaries, commissions, bonuses, sick pay, vacation time and employer contributions to retirement accounts. Certain payments are exempt from FUTA tax, including employer contributions to health plans and reimbursements for qualified expenses.
To calculate how much you need to pay in FUTA taxes, you would multiply the tax rate by your employees’ first $7,000 in wages. Here’s an example calculation if you employ 10 people who each earn $10,000 in annual taxable wages:
0.06 x $7,000 x 10 = $4,2000
You would be required to pay $4,200 in annual FUTA taxes to the IRS, in addition to any unemployment tax your state requires.
You must file Form 940 by Jan. 31 to report the amount of annual unemployment tax you owe for the year prior. However, you’ll have to make payments each quarter throughout the year.
At the end of each quarter, calculate how much FUTA tax you owe. If the cumulative amount exceeds $500, then you must make a payment. If it’s less than $500, then you can carry the amount into the next quarter.
You must make a payment when submitting Form 940 if your FUTA tax for the previous fourth quarter, along with any unpaid tax from earlier quarters, exceeded $500. Otherwise, you don’t have to pay to file the form.
Who needs to file Form 940?
Not every employer is required to file Form 940. The IRS has criteria in place to help you determine if you need to report unemployment taxes.
You must file Form 940 if:
- You paid at least $1,500 in wages to employees during any quarter of the calendar year.
- You had one or more full-time, part-time or temporary employees working at any point during 20 or more different weeks throughout the year.
Any employers who sold or acquired a business throughout the year must also file Form 940 if they meet the above criteria. If the business operates as a partnership, partners do not count as employees.
Household employers are required to pay FUTA tax if they paid more than $1,000 in wages during the calendar year. A household employee includes anyone you pay who works in a private home or a local college club or chapter of a college fraternity or sorority.
Organizations that are tax-exempt under IRS code 501(c)(3), such as charitable, religious, educational and scientific organizations, as well as those that are exempt under 501(a), do not need to file Form 940.
In addition to filing Form 940, employers must meet unemployment tax requirements in their state. Each state has its own tax rate and specific amount of wages that are subject to tax. The wage base and the tax rate may change each year. However, rates can be assigned to specific businesses based on the number of former employees who file for state unemployment benefits. Businesses with high employee turnover may be assigned higher tax rates.
State unemployment tax also affects FUTA tax. You may be eligible for a 5.4% FUTA tax credit for your state contributions if your state has had to borrow federal money to fund local unemployment costs.
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How to pay unemployment tax
After calculating what you owe, you can make your quarterly FUTA tax payments through the Electronic Federal Tax Payment System (EFTPS) at eftps.gov.
You must first enroll in the service before you can use the tax payment system. Once the IRS has validated your information, you’ll receive a PIN number through the mail within five to seven business days. You’ll need this PIN and your Employer Identification Number to make payments.
Payments are due on the last day of the month after the end of the quarter in which your accumulated FUTA tax exceeded $500. The frequency of your payments would depend on how many people you employ and their wages.
The fiscal quarters throughout the year are generally broken down as follows:
- Quarter 1: January through March
- Quarter 2: April through June
- Quarter 3: July through September
- Quarter 4: October through December
Be sure to make your payments online before 8 p.m. EST the day before the money is actually due. That way, you’ll leave time for the deposit to go through without being late. Your bank will debit the amount you’ve requested and send the money to the IRS.
If the EFTPS website is down when you need to make a payment, you’re still responsible for paying on time. You can make a tax payment via phone by calling 1-800-555-3453.
The bottom line
Running your own business comes with a cost. The IRS expects a cut of the money you make, and as you add more people to your company, that cost gets bigger.
In addition to standard employment tax that you must deposit and report, such as federal income tax, Social Security and Medicare taxes, you’re also required to pay unemployment tax.
Federal unemployment tax only applies to a portion of the wages you pay employees, and you only need to make payments once a quarter at most, depending on your number of employees and how much you pay them.
To avoid any mistakes or confusion when filing Form 940, you may want to consult a CPA or tax attorney to help you stay on track.