Small businesses need to pay federal unemployment taxes, known as FUTA tax. These taxes fund the federal oversight of unemployment programs in all 50 states, plus US territories. FUTA is paid quarterly, although there are exceptions. This article leads you through FUTA, how to calculate and pay it, and how to file IRS Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Payroll software like Gusto, can calculate and pay your FUTA taxes for you. It tracks earnings accordingly so you don’t pay more than required on the first $7,000 of each employee’s wages. In addition, it files Form 940 on your behalf to report your FUTA taxes to the IRS. Sign up for a free 30-day trial to see how it works.
How FUTA Works
Employers calculate FUTA taxes owed each time they do payroll. Employers owe FUTA on the first $7,000 of each employee’s earnings. This includes tips, commissions, other payments, and even moving expenses. However, fringe benefits like meals, contributions to employee health plans or life insurance, or contributions to retirement accounts are exempt. The base rate for FUTA tax is 6%.
States may also have unemployment taxes under the State Unemployment Tax Act (SUTA). If you pay SUTA tax, you may get a tax credit from the federal government, reducing your FUTA. In some states, that can cut your FUTA percentage by as much as 5.4%. A few states (Alaska, New Jersey, and Pennsylvania) allow employee contributions to SUTA, but most don’t.
FUTA Credit Reduction States
Some states borrow money from the federal government to pay unemployment benefits to state citizens. If they do not pay the federal government back, they become a credit reduction state. This could mean that you will pay a higher FUTA rate as the government reduces your SUTA tax credits by 0.3% for each year your state owes on its loan. As of August 2020, this only applies to employers in the Virgin Islands, but you can check the Department of Labor website for the most current list.
Who Pays FUTA?
If you paid $1,500 or more in wages during a calendar quarter of this year or the previous year, you need to pay FUTA. You also need to pay if you employed someone with hourly or salary wages for more than 20 weeks of the year. The weeks don’t have to be consecutive but keep in mind that FUTA does not apply to contract employees.
If you paid a household employee (someone who does housework in a home, college club, or fraternity/sorority) more than $1,000 in a quarter, then you must pay FUTA on their earnings. If you paid a farmworker more than $20,000 cash wages during a calendar year or employed 10 or more farmworkers during any 20 or more different weeks in a year, then you must pay FUTA. Check Chapter 14 of the IRS Employer’s Tax Guide if you have questions.
Did you know?
If you run a religious, educational, scientific, charitable, or other 501(c)(3) organization that is exempt from tax under section 501(a), you do not have to pay FUTA taxes nor file Form 940.
To learn about more payroll taxes you may be responsible for, check out our employer payroll tax guide.
When FUTA Payments Are Due
FUTA requires quarterly payments. If your FUTA is over $500 a year, you need to deposit according to the schedule below. If your FUTA is less than $500, you can deposit it or pay it the next quarter—or by Jan.31 of the next calendar year if it never grows to more than $500 at one time.
|If Undeposited FUTA Tax is More Than $500 on:||Tax Payment is Due By:|
January 31 of the next year
How FUTA Is Paid
You need to pay FUTA via the Electronic Federal Tax Payment System (EFTPS). This is a free system provided by the Department of Treasury for paying federal taxes. If not enrolled, you can enroll online at the EFTPS website or call 888-725-7879 Monday through Friday from 9 a.m. to 6 p.m. Eastern time. If you have a payroll service, they may make payments for you, but the IRS recommends making an account anyway so you can check on payments, easily switch companies, or make payments yourself.
You must submit your tax payments by 8 p.m. Eastern time at least one calendar day before the tax due date. If any FUTA due date falls on a Saturday, Sunday, or legal holiday, you can deposit it on the next business day.
In extraordinary circumstances, same-day wire payments are allowed. You can find the Same-Day Taxpayer Worksheet on the EFTPS website. Submit both filled-out pages to your financial institution.
How Much FUTA Tax Your Business Owes
If an employee earns more than $7,000, you only pay FUTA tax on the first $7,000. The base rate is 6%. For example, if you paid an employee $5,000 in a year, you will owe $300 for that employee ($5,000 X 0.06 = $300). If the employee earns $11,500, you only pay FUTA on the first $7,000: $7,000 X 0.06 = $420. And remember, you cannot use employee wages to pay this; it is your responsibility to cover this tax.
If you are paying SUTA, you generally receive a 5.4% credit on your FUTA tax. That means, if you pay state unemployment, your FUTA tax rate may be only 0.6%. In the examples above, that means you’d pay $30 for an employee earning $5,000. For employees earning over $7,000, you’d pay $42.
When to File FUTA Tax on Form 940
Form 940 for the 2020 tax year is due by Jan. 31, 2021. However, if you deposited all your FUTA taxes quarterly when they were due, you can file as late as Feb. 10, 2021. The IRS prefers that you submit your form electronically. However, if you decide to mail the form, you must use the U.S. Postal Service, as most delivery services will not deliver to P.O. boxes. There are different addresses depending on the state and whether or not you are including a payment. Form 940 instructions show the appropriate mailing addresses.
If you have a payroll service, like Gusto, it will do this automatically for you.
How to Complete Form 940
The IRS Form 940 is used by most businesses to determine and report FUTA taxes owed. Some industries, such as agriculture, need a different form. Check the IRS website if you think you need a different form. As of Aug. 2020, the IRS has only released the 2019 form; the 2020 form should be released toward the end of the year.
- General information: Enter your contact information and EIN. Fill out the trade name box if your business operates under a name different from your business’s legal name. Check the box to the right to see if any of the conditions apply to you; generally, they won’t.
- Part 1: Indicate whether you paid unemployment tax in one state or multiple states. Also, indicate if one of the states is a credit reduction state. Be sure to attach the completed Schedule A. Unless all your employees are exempt from state unemployment taxes, you must fill out this section.
- Part 2: Calculate the total FUTA that you owe. The form asks for total wages, exempt wages, and wages over $7,000 per employee. The IRS Form 940 Instructions offer more details. Then, multiply this amount by 0.6% (.006) to determine your base amount.
- Part 3: Calculate any adjustments to your FUTA. Rather than subtracting if you pay SUTA, the IRS has you add if you were exempt from SUTA. Therefore, if you did not pay SUTA for any state where you employ people, you need to fill this out. You may need Form 940 Schedule A. If any line does not apply to you, you can leave it blank.
- Part 4: Follow the directions to determine your FUTA owed. If you accidentally overpaid, you can choose to apply the excess to your next FUTA payment or have the IRS refund the balance. If any line does not apply to you, you can leave it blank.
- Part 5: Show your total FUTA liability for each quarter. If the FUTA reported on line 12 is less than $500, skip this section.
- Part 6: If you have a third-party handling your accounts and want to allow the IRS to contact them for questions, fill out this section. This has to be the name of a specific person, not the name of an organization or a person’s job title. You or your designee needs to choose a five-digit PIN that the IRS will use to confirm the person’s identity when talking to them.
- Part 7: Sign and print your name, and give the best phone number for contacting you during the day.
To learn about more payroll tax forms you may be responsible for completing, check out our guide on payroll forms.
If you employed someone for more than 20 weeks or paid an employee more than $1,500 in a year, then you need to pay federal employment taxes. You pay 6% on the first $7,000 of each employee’s wages, and there is a discount if you pay state unemployment taxes. You need to fill out the IRS Form 940 correctly each year and pay FUTA on time each quarter to avoid penalties. The form is not difficult, but you do want to be precise.
If you prefer not to deal with the calculations and making the payments, Gusto is a payroll software that will make these calculations for you. It also takes care of the quarterly filing and guarantees you won’t pay any tax penalties for errors its representatives make. Sign up for a 30-day trial to try it out.