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Tax time is just around the corner, and there are a few things to keep in mind when filing your taxes. FUTA tax information will help you understand how this new type of income can affect you. With that said, it’s important to know what documents are needed for FUTA purposes and where they should be sent.
Employers pay the IRS the Federal Unemployment Tax Act (FUTA) tax to finance the unemployment program, which compensates qualifying people who have lost their jobs. This is not to be confused with state unemployment taxes (SUTA). Employers are only required to pay a maximum of 6% on each employee’s first $7,000 in earnings, according to federal laws. You’ll use Form 940 to calculate and report the total amount of FUTA taxes you owe and have paid at the end of each year.
Who is responsible for the FUTA tax?
FUTA taxes are computed and processed every time a business processes payroll, but they are not taken from employee compensation. Employers are required to pay the FUTA tax if they fulfill the following criteria.
- Employed employees with hourly or salary earnings for more than 20 weeks in a year (notice that the weeks do not have to be consecutive)
- Employed domestic staff (someone who does chores in a home, a college club, or a fraternity/sorority) and paid them more than $1,000 in a quarter
- Employed 10 or more farmworkers during any 20 or more distinct weeks in a year, or paid a farmworker more than $20,000 in cash payments for a calendar year
What if I told you that Religious, educational, scientific, benevolent, and other 501(c)(3) organizations are not required to pay FUTA taxes or submit Form 940 since they are exempt from taxation under section 501(a). Furthermore, FUTA does not apply to contract workers.
How Is The FUTA Tax Calculated?
The FUTA tax has a maximum tax rate of 6%. Each employee’s first $7,000 in earnings is subject to the tax. Tips, commissions, and other payments, such as relocation fees, are all included. Fringe benefits, on the other hand, are excluded, such as meals and payments to employee health plans, life insurance, and retirement funds.
For example, if you pay an employee $5,000 over the course of a year, you will owe $300 ($5,000 x 0.06 = $300). If the employee makes $11,500, you only have to pay FUTA tax on the first $7,000 ($7,000 x 0.06 = $420).
Under the SUTA, states may additionally levy unemployment taxes. Employee payments to SUTA are allowed in a few states (such as Alaska, New Jersey, and Pennsylvania). If your company is obliged to pay SUTA tax, you may be eligible for a federal tax credit that may lower your FUTA tax by up to 5.4 percent.
If you pay SUTA tax and get a 5.4 percent credit on your FUTA tax, your FUTA tax rate will be just 0.6 percent. This implies you owe $30 for a $5,000-per-year employee ($5,000 x 0.006 = $30) and $42 for a $7,000-per-year employee ($7,000 x 0.006 = $42).
States with FUTA Credit Reductions
To provide unemployment benefits to state residents, several states borrow money from the federal government. They will become a credit reduction state if they do not repay the federal government. Because the government cuts SUTA tax credits by 0.3 percent for each year that the state owes on its loan, employers will face a higher FUTA tax rate. As of this writing, this rule only applies to employers in the Virgin Islands. Check the Department of Labor’s website for the most up-to-date list.
When Do FUTA Tax Payments Have To Be Made?
Before submitting your yearly Form 940, deposit any FUTA tax payments due for the calendar year. It needs quarterly payments, although depending on the amount of tax debt, firms might choose not to pay every quarter. If your FUTA tax for the calendar year exceeds $500, you must make at least one quarterly payment and then remit the balance by the fourth quarter according to the schedule below.
Employers that owe less than $500 in FUTA tax in a calendar quarter may roll it over to the next. You may continue to carry the tax burden forward until the total FUTA tax exceeds $500. However, you must pay the whole amount by January 31 of the next calendar year, even if it never surpasses $500. You may be assessed penalties if your FUTA tax balance surpasses $500 and you do not make quarterly payments.
You may deposit your FUTA tax payment on the following business day if the due date occurs on a Saturday, Sunday, or legal holiday.
FUTA Taxes and How to Pay Them
You must use the Electronic Federal Tax Payment System to pay your FUTA taxes (EFTPS). The Department of Treasury provides a free mechanism for paying federal taxes. You may enroll online at the EFTPS website or by calling 800-555-447 from 9 a.m. to 6 p.m. Eastern time Monday through Friday (ET).
If you use a payroll service, your provider may pay your FUTA taxes on your behalf. However, the IRS advises that you open an EFTPS account so that you may monitor your payments, switch businesses, and deposit payments yourself.
Furthermore, FUTA tax payments must be received by 8 p.m. Eastern time one calendar day prior to the tax payable date. Same-day wire payments are permitted in certain instances. This sort of transaction requires the use of a Same-Day Payment Worksheet, which may be found on the EFTPS website. Send your banking institution two completed pages.
You’re accountable for more than simply FUTA taxes as an employer.
When Should You File Form 940 for FUTA Tax?
Form 940 must be submitted by January 31 of the year following the year for which you are required to file. You may file as late as Feb. 10 if you submitted all of your FUTA taxes quarterly when they were due. Your paperwork should be submitted online, according to the IRS. If you want to send the form, you must do it via the United States Postal Service, since most delivery firms will not deliver to P.O. boxes.
Depending on the state and whether or not you’re sending a payment, you’ll need to provide a different address. The necessary postal addresses may be found in the Form 940 instructions.
Where Can I Get Form 940 and How Do I Fill It Out?
The IRS website has Form 940 for employers to download. It’s a web-based document that enables you to fill in certain data fields. Before and after filling out the form, you may download and print it.
How to Fill Out Form 940
Although FUTA tax payments are made weekly, filing Form 940 to report your unpaid taxes should be done at the end of the year. While most firms utilize Form 940, certain enterprises in specialized sectors (such as agriculture) need a distinct form (Form 943). If you believe you need a tax document other than Form 940, you may look it up on the IRS website.
Form 940, page 1
Form 940, page 2
Annual versions of Form 940 are usually released by the IRS around the conclusion of each calendar year. For example, in the fourth quarter of 2021, the IRS will issue an upgraded version.
You must supply information about your firm, total employee wages, and FUTA tax facts to complete Form 940. The following parts make up the form:
- Information about the company: Here you will put your contact information as well as your employer identification number (EIN). If your company works under a name other than its legal name, fill complete the trade name box. To determine whether any of the criteria apply to you, check the box to the right (labeled Type of Return); in most cases, they won’t.
- Part 1: State whether you paid unemployment taxes in more than one state. You must attach a completed Schedule A form if you are a multi-state employer and/or one of the states is a credit reduction state. You must fill out this area unless all of your workers are exempt from state unemployment taxes.
- Part 2: Determine how much FUTA you owe in total. Total earnings, exempt wages, and salary payments paid to each employee earning more than $7,000 are requested on the form (you can check the Form 940 Instructions for other taxable FUTA wages). To get your base amount, multiply the entire amount by 0.6 percent (0.006).
- Part 3: Make any revisions to your FUTA calculation that are necessary. If you were partly or completely exempt from SUTA taxes, this is essential. You must include any FUTA sums for which you did not pay SUTA. If you’re a multi-state employer, this area may need a completed Form 940 Schedule A.
- Part 4: Follow the instructions on the form to figure out how much FUTA you owe. If you overpaid by mistake, you may either apply the excess to your next FUTA tax payment or request a refund from the IRS.
- Part 5: For each quarter, show your entire FUTA liabilities. Skip this section if the FUTA recorded on line 12 (in Part 4) is less than $500.
- Part 6: Fill out this area if you have a third-party managing your accounts and want the IRS to approach them with queries. This must be the name of a particular individual, not the name of a company or a job position. When speaking with the IRS, you and your designee must pick a five-digit PIN that the IRS will use to validate the person’s identification.
- Part 7: Sign and print your name, as well as provide a phone number where you may be reached throughout the day.
Conclusion
FUTA taxes must be paid by businesses that employ employees for more than 20 weeks or pay an employee more than $1,500 per year. While you owe 6% on the first $7,000 of each employee’s salary, if you pay state unemployment taxes, you may obtain a rebate of up to 5.4 percent. Additionally, paying your FUTA taxes on time each quarter and accurately filling out IRS Form 940 each year might help you avoid fines and tax problems.
Consider utilizing payroll software like Gusto if you don’t want to bother with calculating and paying FUTA tax payments. The program does all of the calculations for you, taking into account the statutory thresholds, and files your FUTA tax return at the end of the year.
