» » IRS Form 940

When and How Do You File IRS Form 940?

Employer's Annual Federal Unemployment Tax Return (FUTA)

At the end of each calendar year, you must file IRS Form 940 which is the Federal Unemployment Tax Act (also known as FUTA). As the employer, you will pay federal unemployment tax on the first $7000 you pay to each employee during the calendar year.

video example for irs form 940

To help you to understand this tax, I've included two videos on this page.

This tax is paid by the employer and is not withheld from the employees pay each pay period.

The federal government works in conjunction with the state governments when it comes to unemployment taxes. Most employers will pay both a federal and state unemployment tax. The federal tax that is paid is used to oversee the state unemployment systems.

Technically the FUTA tax rate is 6%. However, you will get a maximum credit of 5.4% if you pay the state unemployment fund in a timely manner (by January 31st). This reduces the FUTA tax rate to .6% (.006). However, if you do not pay your state unemployment taxes in a timely manner, then you will not be eligible for the credit reduction.

When Must You Deposit Your FUTA TAX?

Although IRS Form 940 is not due until after the end of the calendar year, you may be required to deposit your FUTA tax before you file the return. Each quarter you should calculate your FUTA liability.

If your FUTA tax is below $500, then you will carry it over into the next quarter. If your cumulative FUTA tax reaches $500 or more, then you must make a deposit that quarter.

For this reason, you must keep accurate records of your FUTA liability each quarter.

By the end of fourth quarter, if your FUTA liability is $500 or more, then you should make a deposit by January 31st. If it is less than $500 at the end of the fourth quarter, then you can deposit the amount or pay it when you file IRS Form 940 by January 31st.

So, just to summarize....

If your FUTA liability is $500 or greater on...

  • March 31st - then make your deposit by April 30th.

  • June 30th - then make your deposit by July 31st.

  • September 30th - then make your deposit by October 31st

  • December 31st - then make your deposit by January 31st.

  • **At the end of the year, you must deposit your FUTA liability by January 31st, even it it hasn't hit the $500 limit. You are responsible for paying FUTA tax on a yearly basis.

How Do You Figure Out Your FUTA Tax Liability Each Quarter?

Below you will find a video on calculating your FUTA liability, with the same example explained on this page. Feel free to watch the video or read through the example to better understand how to calculate your FUTA liability.

youtube channel If you want to see this example on video, click here to visit my You Tube channel.

You calculate your FUTA tax by multiplying the amount of taxable wages (for the quarter) by .006. Once an employee has earned $7000, their wages are no longer "taxable". Here's an example..

Let's say you have 3 employees. Their wages are outlined in the table below.

Example of 940 calculation

Notice how for each employee, their first set of wages was subject to FUTA tax because no one was paid wages greater than $7000.

The total FUTA liability for the first quarter is only $57 because you multiply the total wages by .006 which is the FUTA rate with the credit reduction.

Since this amount is less than $500, we will carry the amount over into the second quarter.

You will then want to calculate how much of future wages is subject to FUTA tax by subtracting their current wages from $7000. Once an employee is taxed on $7000, you no longer have to pay FUTA tax for that employee.

940 calculations example

For example, in the second quarter, employee A is only subject to being taxed on $3000 in wages because they've already been taxed on $4000. $7000-4000 = $3000. Since employee A was paid more than $3000 in wages for the second quarter, he/she will only be taxed on $3000 because that is where the $7000 limit is reached.

Employees B and C are still below the $7000 limit, so we needed to calculate how much of their 3rd quarter earnings will be subject to FUTA tax.

At the end of the second quarter, you will carry over the first quarter liability of $57 and add to that amount second quarter's liability of $42. At this point in the year, your total FUTA liability is only $99. Therefore, you would not have to make any deposits.

example of 940 calculations

For the third quarter, employee A is exempt from being taxed since we have reached the $7000 limit. Employees B and C are taxed on the remaining FUTA wages carried over from Quarter 2.

Now we add Quarter 3 liability of $27 to the carryover of $99 and we still at the end of third quarter only owe $126 in FUTA tax.

Supposing that you do not hire any more employees in the calendar year, your FUTA liability of $126 will be due by January 31st and this will be the FUTA liability on your IRS Form 940.

If you do hire any new employees throughout the year, then they too will be subject to FUTA tax on the first $7000 in earnings for the year. You would need to add them to the table and being calculating their FUTA tax in the quarter in which they are hired.

Hopefully this table has helped you to understand how to calculate your FUTA liability for each quarter and then calculate your total FUTA tax each quarter.

How Must You Deposit Your FUTA Tax?

If your FUTA tax liability is $500 or more, then you must deposit your FUTA tax using electronic funds transfer (EFT). Funds are typically deposited using EFTPS.

Click here for more information on using EFTPS.

Completing the IRS Form 940

The actual IRS Form 940 is pretty easy to complete. You will need information about your employee's wages and other compensation similar to the example above.

Below you will find a video detailing exactly how to complete the 940 Form. You will also find the same process explained below. Feel free to use whichever method works best for you.

youtube channel If you want to see this example on video, click here to visit my You Tube channel.

Part 1: About Your State Unemployment

  • Part 1 of the IRS Form 940 wants to know about the states in which you contributed to state unemployment. These are basically the states in which your employees live and to which you filed unemployment taxes.
    If you filed unemployment taxes in multiple states, then you will also need to complete Schedule A for Form 940.

  • In Line 2, the IRS also wants to know if you paid unemployment taxes to a state that is considered a credit reduction state. This means that the state has not paid back money that is borrowed from the federal government to pay unemployment benefits. If your state is listed, then you will have to pay more FUTA tax, because there is a reduction in the state credit.
  • Information on which states are considered "Credit Reduction States" is listed at the United States Department of Labor website.

    For the year 2013, this is a list of the states that are considered "Credit Reduction States." You will need to check box 2 and complete Schedule A if your state is listed below.

2013 Credit Reduction States

credit reduction states

Part 2: Your FUTA Tax

Part 2 is where you will determine your FUTA liability. Follow the instructions and if needed, create a table like the one above. You can also use the payroll summary feature in QuickBooks to find totals if you use QuickBooks to complete your payroll.

Part 3: Adjustment to FUTA Tax

If you were not required to pay state unemployment tax because all of the wages that you paid were excluded, then you must pay the full FUTA rate of 6%. This usually applies to corporate officers or other employees in specific occupations. It varies by state, so check with your state unemployment office.

Part 4: Total FUTA Tax

Part 4 of form 940 is where you will determine your FUTA liability and deduct any deposits that you've already made to the IRS. This section is also pretty self explanatory.

Part 5: Liability by Quarter

This is where a chart like the one above comes in handy. If your total FUTA liability was greater than $500, then the IRS would like to know your FUTA liability for each quarter.

If your liability was less than $500, then you do not need to complete this section.

Last but not least, make sure that you sign your IRS Form 940 before mailing to the IRS.

You can use EFTPS to make your deposit. If you do this before completing form 940, then you will want to make sure that on line 13, you enter the amount that you've deposited. This will save you form having to mail a check to the IRS.

If you need more clarification on completing IRS Form 940, then you can read through the instruction manual provided with the form.

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