How Form 940 Reports the Annual Federal Unemployment Tax (FUTA)
What is Form 940?
The Form 940 is an IRS form that employers file annually to report their Federal Unemployment Tax Act (FUTA) taxes. FUTA tax provides funding for unemployment benefits and is exclusively the employer’s responsibility—employees do not contribute to FUTA tax.
The Primary Purpose of Form 940 is to Report:
- Federal Unemployment Taxes (FUTA): Employers pay FUTA tax on the first $7,000 of wages paid to each employee during the calendar year. The standard FUTA tax rate is 6.0%, but employers generally receive a credit of up to 5.4% if they pay state unemployment taxes on time, reducing the effective FUTA tax rate to 0.6%.
- State Unemployment Tax Credits: Employers who pay state unemployment taxes may qualify for a credit against their FUTA tax, significantly reducing their federal tax liability.
- Unemployment Fund Contributions: FUTA funds are used to pay unemployment benefits to workers who lose their jobs.
Action Steps for Compliance
Most employers who have paid $1,500 or more in wages during any calendar quarter in the year or previous year must file Form 940.
Additionally, if an employer has one or more employees working for any part of a day in 20 or more different weeks during the year, they are required to file Form 940.
Form 940 Deadlines:
- Due Date: January 31 of the following year
- Extended Deadline: February 10, if the employer has paid all FUTA tax due for the year on time
Employers can file Form 940 electronically or by paper, depending on their preference. Many payroll service providers also offer the option to file on behalf of employers.
Submission Deadlines
The IRS filing submission deadlines for Form 1094-C for the 2024 tax year.
- Electronic Filing Deadline: March 31, 2025
- Family Coverage: February 28, 2025
Employers can file Form 940 electronically or by paper.
Steps for Employers to File Form 940
1. Calculate FUTA Liability:
Determine the FUTA tax owed on the first $7,000 of each employee’s wages, taking into account any eligible state unemployment tax credits.
2. Complete Form 940:Report the total FUTA tax liability, state credits, and any adjustments required.
3. Submit the Form to the IRS:File Form 940 by January 31, electronically or by paper, along with any payment due.
The funds collected through FUTA support the federal and state unemployment programs, which benefit eligible jobless individuals.
Calculating Federal Unemployment Tax Act (FUTA) Tax
Calculating the Federal Unemployment Tax Act (FUTA) tax involves determining the tax on the first $7,000 of each employee’s annual wages.
1. Multiply the first $7,000 of each employee’s wages by 6.0%.
2. Subtract the state unemployment tax credit (up to 5.4%) if eligible.
3. Total the adjusted FUTA tax for all employees
4. Pay quarterly if your liability exceeds $500; otherwise, pay annually with Form 940.
1. Understand the FUTA Tax Rate and Wage Base
- Standard FUTA Tax Rate: 6.0%
- Wage Base: Only the first $7,000 of wages paid to each employee during the year is subject to FUTA tax. Any amount paid beyond this wage base is exempt from FUTA tax.
Employers who pay state unemployment taxes on time may be eligible for a tax credit of up to 5.4%, which reduces the effective FUTA tax rate to 0.6%.
Effective FUTA Tax Rate:
- With Full State Credit: 0.6% (6.0% – 5.4% = 0.6%)
- Without State Credit: 6.0% if no state unemployment taxes were paid
2. Calculate the Gross FUTA Tax Liability
For each employee:
- Multiply the first $7,000 in wages by the standard FUTA rate of 6.0%
- This will provide the gross FUTA tax for that particular employee
For Example:
1. If an employee earns $7,000 or more in the year, the gross FUTA tax is:
- $7,000 x 6.0% = $420
2. If the employee earns less than $7,000 a year, multiply their actual earnings by 6.0%.
3. Apply State Unemployment Tax Credit (If Applicable)
If an organization qualifies for the maximum credit (5.4%) by paying state unemployment taxes on time, they can reduce their FUTA tax liability:
- Subtract the state tax credit from the standard FUTA tax rate
- With the full 5.4% credit, the effective FUTA rate becomes 0.6%
4. Calculate Total FUTA Tax Liability for All Employees
Add up the FUTA tax calculated for each employee (after applying the credit, if applicable) to determine the total FUTA tax liability for the year.
For Example: Suppose you have 10 employees, each earning $7,000 or more. With the full state tax credit: ($7,000 x0.6%) = 42 FUTA per employee x 10 = $420
5. Make Quarterly Payments (If Liability Exceeds $500)
Organizations must make quarterly payments if their total FUTA tax liability exceeds $500 for the year. If it’s less than $500, they can wait until the end of the year to pay it when filing Form 940.
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