FUTA Taxes & Form 940 Instructions
This article is part of a larger series on How to Do Payroll.
The Federal Unemployment Tax Act (FUTA) tax is what employers pay the IRS to fund the unemployment program that pays eligible workers who have lost their jobs. This is separate from state unemployment taxes (SUTA). Federal regulations only require employers to pay a maximum of 6% on each employee’s first $7,000 of earnings. At the end of each year, you’ll use Form 940 to determine and report the total amount of FUTA taxes you owe and have paid.
If you want to automate your FUTA tax payments and filing, consider using a payroll solution, like Gusto. Gusto tracks earnings and calculates your FUTA taxes per employee up to the required threshold. It also remits your taxes to the IRS quarterly, ensuring you aren’t penalized for waiting until year-end to pay. Sign up for a free trial today.
Who Pays FUTA Tax
While FUTA taxes are calculated and processed every time employers do payroll, the taxes aren’t deducted from employee wages. Employers have to pay FUTA tax if they meet the following requirements:
- Paid $1,500 or more in employee wages during a calendar quarter of this year or the previous year
- Employed staff—such as full-time, part-time, and temporary workers—with hourly or salary wages for more than 20 weeks of the year (note that the weeks don’t have to be consecutive)
- Employed household staff (someone who performs housework in a home, college club, or fraternity/sorority) and paid more than $1,000 in wages in a quarter
- Paid a farmworker more than $20,000 cash wages during any calendar year, or employed 10 or more farmworkers during any 20 or more different weeks in the current or preceding calendar year
Did you know?
Religious, educational, scientific, charitable, and other 501(c)(3) organizations that are exempt from tax under section 501(a) don’t have to pay FUTA taxes or file Form 940. Additionally, FUTA does not apply to contract employees.
How FUTA Tax Is Calculated
The maximum tax rate for FUTA tax is 6%. The tax is applied to the first $7,000 of each employee’s earnings. This includes tips, commissions, and other payments, including moving expenses. However, fringe benefits—like meals and contributions to employee health plans, life insurance, and retirement accounts—are exempt.
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 tax on the first $7,000, which amounts to $420 ($7,000 x 0.06 = $420).
Note that states may also have unemployment taxes under the SUTA. A few states even allow employee contributions to SUTA (like Alaska, for example, where employers pay 73% of the costs and employees pay the remaining 27%). If your business is required to pay SUTA tax, you may get a tax credit from the federal government, which can reduce your FUTA tax by as much as 5.4%.
For example, if you pay SUTA tax and get a 5.4% credit on your FUTA tax, then your FUTA tax rate is only 0.6%. This means that you owe $30 for an employee earning $5,000 in a year ($5,000 x 0.006 = $30) and $42 for an employee earning over $7,000 ($7,000 x 0.006 = $42).
Need help with more payroll calculations? Check out our guide on how to calculate payroll.
FUTA Credit Reduction States
Some states borrow money from the federal government to pay unemployment benefits to state citizens. If they don’t pay the federal government back, they become a credit reduction state. For employers, this means that they will pay a higher FUTA tax rate as the government reduces SUTA tax credits by 0.3% for each year that the state owes on its loan.
In the News
Due to the pandemic, many states experienced high unemployment rates, and this led several of them to borrow from the federal unemployment account. If the loans aren’t paid back by Nov. 10, 2022, the amount of the tax credit permitted will be reduced for those states, resulting in higher FUTA taxes for employers in those states. Nine states (California, Colorado, Pennsylvania, Connecticut, Illinois, Massachusetts, Minnesota, New Jersey, and New York) and the Virgin Islands are at risk of being assessed credit reductions.
When FUTA Tax Payments Are Due
FUTA tax payments due for the calendar year should be deposited before filing your annual Form 940. It requires quarterly payments, but employers have the option not to pay every quarter, depending on the amount of tax liability. If your FUTA tax is over $500 for the calendar year, you need to deposit at least one quarterly payment and then remit the remaining amount by the fourth quarter following the schedule below.
|If Undeposited FUTA Tax is More Than $500 on:||Tax Payment is Due By:|
Jan. 31 of the next year
Employers whose FUTA tax is less than $500 in a calendar quarter can carry it over to the next quarter. You can continue carrying the tax liability over until the cumulative FUTA tax is more than $500. However, you have to pay the entire amount—even if it never exceeds $500—by Jan. 31 of the next calendar year. If your FUTA tax balance exceeds $500 and you don’t send in quarterly payments, you can be charged penalties.
If the FUTA tax payment due date falls on a Saturday, Sunday, or legal holiday, you can deposit it on the next business day.
How to Pay FUTA Taxes
You need to pay FUTA taxes via the Electronic Federal Tax Payment System (EFTPS). This is a free system provided by the Department of Treasury for paying federal taxes. You can enroll online through the EFTPS website, or call 800-555-447 Monday through Friday, 9 a.m. to 6 p.m. Eastern time.
If you have a payroll service, your provider can make FUTA tax payments for you. However, the IRS recommends that you create an EFTPS account anyway so that you can check payments, switch companies, and have the option to deposit payments yourself.
FUTA tax payments must be submitted by 8 p.m. ET at least one calendar day before the tax due date. In extraordinary circumstances, same-day wire payments are allowed. Note that this type of transaction requires a Same-Day Payment Work Sheet, which you can find on the EFTPS website. Submit both filled-out pages to your financial institution.
As an employer, you’re responsible for more than just FUTA taxes. Check out our employer payroll tax guide for a full list so that nothing slips by you.
When to File FUTA Tax on Form 940
Form 940 is due by Jan. 31 of the year following the year you need to report. However, if you deposited all your FUTA taxes quarterly when they were due, you can file as late as Feb. 10. 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. You can check the Form 940 instructions for the appropriate mailing addresses.
Where to Get Form 940 & How to Complete It
Employers can get Form 940 from the IRS website. It is an interactive document that allows you to fill out specific data fields online. You can also download and print it before and after completing the form.
- Download IRS Form 940
- View IRS Form 940 instructions
How to Complete Form 940
FUTA tax payments may require quarterly payments, but preparing Form 940 to report your taxes owed should be done at the end of every year. While Form 940 is used by most businesses, some companies in specific industries need a different form (such as Form 943 for agricultural employees). You can check the IRS website if you think you require a tax document other than Form 940.
Note that the IRS typically releases annual versions of Form 940 toward the end of each calendar year. For example, during the latter part of 2022, the IRS will release an updated version in the fourth quarter.
To complete Form 940, you have to provide information about your business, total employee earnings, and FUTA tax details. The form has the following sections:
- General information: This is where you enter your contact information and employer identification number (EIN). Fill out the trade name box if your business operates under a name different from your business’ legal name. Check the box to the right (titled Type of Return) 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. If you’re a multistate employer and/or one of the states is a credit reduction state, you have to attach a completed Schedule A form. 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 salary payments made to each employee earning over $7,000 (you can check the Form 940 Instructions for other taxable FUTA wages). Then, multiply the total amount by 0.6% (0.006) to determine your base amount.
- Part 3: Calculate any adjustments you need to make to your FUTA calculation. This is required if you were either partially or fully exempt from SUTA taxes. You’ll need to add in any FUTA amounts that you didn’t pay SUTA on. Note that if you’re a multistate employer, you may need a completed Form 940 Schedule A for this section.
- Part 4: Follow the form’s directions to determine your FUTA owed. If you accidentally overpaid, you can choose to apply the excess to your next FUTA tax payment or have the IRS send you a refund of the balance.
- Part 5: Show your total FUTA liability for each quarter. If the FUTA reported on line 12 (in Part 4) 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 an organization’s name or a person’s job title. You and your designee need 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 phone number for contacting you during the day.
To learn about more payroll tax forms that employers are responsible for completing, check out our guide on payroll forms.
Businesses that employ workers for more than 20 weeks or pay an employee more than $1,500 in a calendar quarter are required to pay FUTA taxes. While you owe 6% on the first $7,000 of each employee’s wages, you can get a discount of up to 5.4% if you pay state unemployment taxes. Further, paying your FUTA taxes on time each quarter and filling out the IRS Form 940 correctly each year can help you avoid penalties or tax errors.
If you prefer not to deal with calculating and making FUTA tax payments, consider using payroll software like Gusto. The software performs all calculations, taking into account required thresholds, and will file your FUTA tax report at year-end. And if on the off chance you incur any penalties because of errors its representatives make, Gusto will cover them 100%. Try it free today.