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

Tax Basics: 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 employees’ paychecks. As an employer, you’ll file Form 940 to report your annual FUTA tax liability.

The FUTA tax applies to the first $7,000 each employee makes in a calendar year. The 2017 FUTA tax rate is 6%, but most employers receive a maximum credit of 5.4% based on unemployment taxes paid to your state. If you paid all your state unemployment taxes on time, you are entitled to the maximum credit.

How to Complete Form 940

Start by entering your EIN and legal business name. Your legal business name is the same name you used when you applied for your EIN. If you do business under another name, enter that name in the Trade Name line.

Part 1

Complete Line 1a-b even if you’re not required to pay a state unemployment tax because the state tax rate was zero. If all wages paid were excluded from state unemployment tax, leave Line 1a-b blank.

If you paid wages in a state that is subject to credit reduction, you will have to complete Schedule A for Form 940. A credit reduction state is a state that has borrowed money from the federal government to fulfill its unemployment obligations and has not been able to repay the loan.

If you’re a multi-state employer, you are also required to complete Schedule A and attach it to your Form 940.

Part 2

On line 3, make sure that you include all payments made to your employees, even if those payments are not subject to the FUTA tax.

On line 4, enter payments exempt from the FUTA tax. Payments exempt from the FUTA tax include fringe benefits (such as the value of certain meals or lodging, contributions to accident or health plans, and payments excluded under Section 125 plans), group-term life insurance, retirement/pension plans, and dependent care.

Only the first $7,000 paid to each employee, after subtracting any exempt payments, is subject to the FUTA tax. This $7,000 is called the FUTA wage base. On line 5, enter the total payments made to your employees over the FUTA wage base. For example, you have two employees and paid Employee A $25,000, including $1,500 in health insurance benefits, and paid Employee B $10,000, including $1,000 in retirement benefits. To determine the total payments made to each employee over the FUTA wage base, you will subtract the exempt payments and the FUTA wage base from the total payments made to each employee.

Employees A B
Total payments to employees $25,000 $10,000
Payments exempt from FUTA tax ($1,500) ($1,000)
FUTA wage base ($7,000) ($7,000)
Payments made in excess to each $16,000 $2,000
Total payments in excess (line 5) $18,000

To calculate line 6, add line 4 and line 5. To calculate line 7, subtract line 6 from line 3. To calculate line 8, your FUTA tax before adjustments, multiply line 7 by 0.6% or 0.006. This assumes that you will receive the maximum tax credit.

Part 3

If you weren’t required to pay state unemployment tax because all wages were excluded from your state unemployment tax, then you are required to pay the full FUTA tax rate of 6%. To calculate this adjustment for line 9, multiply line 7 by 5.4% or 0.054.

If only some of your FUTA taxable wages were excluded from your state unemployment tax, you will have to complete the worksheet found in the Form 940 instructions and enter the amount in line 7 on the worksheet on line 10 on your Form 940.

If your state is subject to credit reduction, enter the total about from Schedule A on line 11. If you weren’t required to pay state unemployment tax and enetered an adjustment on line 9, skip line 11 and move on to line 12.

Part 4

To calculate line 12, add lines 8, 9, 10, and 11. If you have an amount in line 9, you will not have an amount in lines 10 or 11.

On line 13, enter the FUTA tax you have already deposited for the year.

If line 12 is greater than line 13, you still owe FUTA tax; enter the difference on line 14. If the amount is greater than $500, you must deposit the amount. If the amount is $500 or less, you can pay the amount when you file the form.

If line 13 is greater than line 12, than you overpaid your FUTA tax liability. Enter the difference on line 15 and choose whether you want the IRS to apply the different to your next return or send you a refund.

Part 5

You only have to complete Part 5 if the total on line 12 is greater than $500.

When & Where to File Form 940

For tax year 2017, Form 940 is due by January 31, 2019. You can e-file your Form 940, but if you wish to file a paper Form 940 instead, where you send it will depend on whether you’re sending a payment with the form.

If you are filing between January 1, 2019 and June 17, 2019:

940 addresses beginning of 2019If you are filing after June 17, 2019:

940 addresses for the later part of 2019

When & How to Deposit the FUTA Tax

When you deposit your FUTA tax depends on how much you have to deposit.

If your FUTA tax liability is $500 or less in a quarter, you can carry that amount over to the next quarter. You continue doing this until your tax liability is more than $500.

Once your tax liability is more than $500, you must deposit your FUTA tax by the last day of the month following the end of the quarter. For the first quarter, ending on March 31, deposit your tax by April 30; deposit your tax by July 31, for the second quarter, ending June 30; for the third quarter, ending September 30, deposit your tax by October 31; and for the fourth quarter, ending December 31, deposit your tax by January 31, 2019.

Your deposits must be made using electronic funds transfer (EFT) using the Electronic Federal Tax Payment System (EFTPS). The IRS will automatically pre-enroll you in EFTPS when you first apply for your EIN and will include instructions on completing the enrollment with your EIN. To ensure that your payments are processed on time, submit your payments by 8 PM Eastern time the day before the deposit due date