graphic of tax basics of form 940, annual futa tax return

Tax Basics: Form 940

This article was last edited on 1/9/2020. For updated information on Form 940, visit https://www.irs.gov/forms-pubs/about-form-940.

The Federal Unemployment Tax Act (FUTA) tax and state unemployment taxes provide funds for unemployment compensation paid to workers who have lost their jobs. Only employers pay these taxes, so you will not take them out of your team’s paychecks.

You’ll need to pay the FUTA tax, at a rate of 6 percent, for the first $7,000 each of your staff members makes in a calendar year. However, you’re likely to receive a credit of 5.4 percent if you paid your unemployment taxes to your state on time. That will effectively bring your FUTA rate down to 0.6 percent.

As an employer, you’ll report your annual FUTA tax liability using Form 940: Employer’s Annual Federal Unemployment Tax Return. Keep reading to learn more about filling out and filing Form 940.

How to fill out Form 940

Enter your employer identification number (EIN) and company’s legal business name on both pages. Also, make sure you’ve included your business’s address.

Read also: How to Get an Employer Identification Number

Part 1

  • Line 1a – If you only paid unemployment taxes’ in one state, enter the state’s abbreviation. If all wages paid were excluded from state unemployment tax, you can leave Line 1a blank.
  • Line 1b – If you paid unemployment taxes to multiple states, check the box and make sure to fill out Schedule A (Form 940).
  • Line 2 – If you paid unemployment taxes to a state subject to credit reduction, check the box and fill out Schedule A (Form 940. A state is subject to credit reduction if they borrowed funds from the Federal government to fulfill unemployment obligations and have not yet repaid the loan.

Read also: Does My Small Business Need to Pay Unemployment Insurance Tax?

Part 2

  • Line 3 – Enter how much you paid your team during the year, including any payments that are not subject to FUTA.
  • Line 4 – If any of the payments were exempt from FUTA, enter the total amount. Then, select why the payments were exempt from FUTA.
  • Line 5 – Since only the first $7,000 paid to each worker is subject to FUTA, enter the total payments made to your staff over that amount (after subtracting any exempt payments). For example, if you paid one employee $25,000, including $1,500 in health insurance benefits, their excess amount would be $16,500.
  • Line 6 – Add Lines 4 and 5.
  • Line 7 – Subtract Line 6 from Line 3 to determine your total taxable FUTA wages.
  • Line 8 – Multiply Line 7 by 0.6 percent to determine your FUTA tax before adjustments. This line assumes you will receive the maximum tax credit. If you were not eligible for the maximum tax credit, Part 3 of Form 940 will account for the difference.

Part 3

  • Line 9 – If all your wages paid were excluded from state unemployment tax, multiply Line 7 by 5.4 percent.
  • Line 10 – If some of your wages were excluded from state unemployment tax or if you paid any of your state unemployment tax late, complete the worksheet from the form’s instructions.
  • Line 11 – If your state is subject to credit reduction, enter the total from Schedule A (Form 940).

Part 4

  • Line 12 – Add Lines 8 through 11 to determine your total FUTA tax after adjustments.
  • Line 13 – If you have already deposited FUTA taxes, enter how much you’ve already paid.
  • Line 14 – If Line 12 is greater than Line 13, you still owe FUTA taxes. Subtract Line 13 from Line 12 to determine how much you owe.
  • Line 15 – If Line 13 is greater than Line 12, you’ve overpaid your FUTA taxes. Subtract Line 12 from Line 13 to determine the overpayment. Then, choose whether you want the overpayment to be applied to your next return or if you want a refund.

Part 5

If Line 12 is greater than $500, enter your total FUTA tax liability for each quarter.

How to file Form 940

Form 940 is due by January 31 each year.

If you choose to file the form by paper, where you send it will depend on whether you’re including a payment.

list of states and addresses to file Form 940

When to pay FUTA taxes

If your FUTA tax liability is $500 or less in a quarter, carry that amount over to the next quarter until your tax liability is more than $500. If your tax liability each quarter is $500 or more, it’s due by the last day of the month following the end of the quarter.

  • April 30
  • July 31
  • October 31
  • January 31 of the following year

Read also: Tax Due Dates