Payroll

What’s Form 940? Am I Required to File It?

Form 940 is a tax form that allows employers to report their annual FUTA (Federal Unemployment Tax Act) tax.

Most employers that have employees need to file this form.

Hold up. What is the FUTA tax?

Here’s a quick TL;DR on the FUTA tax:

  • It’s a tax that employers pay.
  • It can’t be collected or deducted from your employees’ wages.
  • When workers in your state lose their job and file for unemployment, their compensation is funded by this FUTA tax along with your state’s unemployment tax.
  • Religious, charitable, and other 501(c)(3) organizations are exempt from paying the FUTA tax.

Do I need to pay the FUTA tax and file Form 940?

You’re required to file Form 940 if either of the following is true:

  • You paid wages of $1,500 or more to W-2 employees during any calendar quarter either during the current or previous year; or
  • You had a W-2 employee work any amount of time for 20 or more weeks of the year. This includes full-time, part-time and temporary employees, and the 20 weeks do not have to be consecutive.

Form 940 FUTA tax

How much FUTA tax do I have to pay?

The 2018 FUTA tax rate is 6%. Keep in mind that you only pay this tax on employees—not independent contractors.

You only owe FUTA tax on the first $7,000 you pay to each employee per year, excluding any exempt payments. Payments exempt from FUTA include things such as health insurance and life insurance costs and workers’ compensation.

For example, say you have ten employees, and you pay all of them more than $7,000 in taxable payments per year. You would multiply the maximum taxable amount per employee ($7,000) by the number of employees (10), and then multiply that by the tax rate of 6%.

$7,000 x 10 x 6% = $4,200 in FUTA tax that you would owe for that year.  

However, in most states, you can receive a tax credit that reduces your FUTA tax liability. If you’re in an eligible state and you pay your state unemployment tax on time, you may be able to get a credit for your FUTA tax for up to 5.4%, meaning you’ll only pay 0.6% in FUTA taxes.

This part can get tricky though, so check with a financial expert to see if your business is eligible for this credit. You can also learn more about the FUTA tax here.

When do I have to submit Form 940?

Form 940 covers a standard calendar year, and the form and payment are due annually by January 31 for the prior year.

There may be earlier payment deadlines, however.

If your FUTA tax liability exceeds $500 for the calendar year, you have to make at least one quarterly payment. If you owe less than $500 for any one quarter, you can roll your balance over to the next quarter until you owe at least $500.

If your total FUTA tax liability is less than $500 for the entire calendar year, you can just submit one Form 940 with your payment by the January 31 deadline.

This article provides general information and shouldn’t be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult a CPA or tax advisor for advice specific to your business.