Tax

Unemployment Tax Form 940

10.11.2019

Author

Jeff Aleixo

unemployment tax form 940 tax compliance

Employers have many roles when it comes to running their businesses, including managing employee taxes. One of their responsibilities is to pay unemployment taxes so that employees may have unemployment benefits if they are terminated from employment.

The Federal Unemployment Tax Act (FUTA) and the State Unemployment Tax Act (SUTA) fund unemployment compensation. FUTA taxes are regulated on a federal basis while SUTA taxes are governed by each state. Employers pay FUTA tax based on employee wages or salaries and they have to submit Form 940 – Federal Employer Unemployment Tax Return. Form 940 shows the amount of federal unemployment taxes employers owed the previous year, how much has already been paid, and the outstanding balance.

What Is Form 940?

Unlike other taxes, unemployment taxes are not withheld from employees’ wages. It is employer’s responsibility to pay those taxes and report them on Form 940.

Along with the federal government, states levy unemployment taxes through the State Unemployment Tax Act. State unemployment taxes affect employers’ federal tax liability, so it is important that they understand both FUTA and SUTA in order to file Form 940 and stay compliant with the IRS.

FUTA and SUTA Taxes 

FUTA taxes are used to fund unemployment benefits for employees who lose their jobs through no fault of their own. States also require businesses to pay unemployment taxes through SUTA. Therefore, states administer unemployment insurance funds with the SUTA taxes they collect and with the FUTA taxes that the federal government passes on to them.

For 2019, the FUTA tax rate is 0.6% on the first $7,000 in wages for each employee, which is equivalent to $42 per employee per year. Businesses that file state unemployment taxes late or that operate in credit reduction states have to pay a higher percentage, up to 6% on the first $7,000 in wages. Depending on the state, SUTA tax rates can vary between anywhere as low as 0.05% or as high as 14%.

Tax rules can vary by location and industry. Use this comprehensive guide to help you understand your responsibilities and ensure tax compliance.

How and When to File Form 940

Employers are required to file Form 940 if either of the following is true:

  • They paid wages of $1,500 or more to W-2 employees during any calendar quarter either during the current or previous year, or
  • They 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 20 weeks do not have to be consecutive.

For most businesses, the deadline for filing Form 940 is January 31, or the next business day if January 31 happens to fall on a weekend. However, the deadline for filing Form 940 is distinct from the deadline for paying unemployment taxes. For businesses that have already deposited their unemployment taxes in full, the deadline is the second Monday of February.

If FUTA tax liability exceeds $500 for the calendar year, employers have to make at least one quarterly payment. If they owe less than $500 for a quarter, they can roll their balance over to the next quarter until they owe at least $500. In case total FUTA tax liability is less than $500 for the entire calendar year, employers can submit one Form 940 with their payment by the January 31 deadline.

Employers can either file Form 940 online or mail it to the IRS. If they send the form electronically, employers need to use an IRS-approved software or a third party. The address employers use to mail Form 940 depends on their business locality and whether they are including payment.

Find out about the differences and similarities between Forms W-2 and W-4 as well as what requirements employers need to meet to remain compliant.

Form 940 Sections

There are six primary sections of Form 940:

General information

Employers provide general information about their business such as business name, address, and employer identification number.

Part 1

Employers indicate whether they paid unemployment tax in one state or multiple states. They also need to provide information if one of the states is a credit reduction state.

Part 2

This part is used to calculate the total FUTA tax that employers owe. To do so, they will need to provide total wages paid to all employees and wages paid in excess of $7,000 per employee.

Part 3

Additional FUTA tax for credit reduction states is reported in Part 3 as well as if employers paid SUTA tax late. Therefore, employers use this part to calculate any adjustments to FUTA tax.

Part 4

Employers show total FUTA tax liability after adjustments and deposits paid throughout the year. This result shows the net balance due or net overpayment.

Part 5

This part shows total FUTA tax liability for each quarter. Part 5 is needed only if total FUTA tax liability reported on line 12 is more than $500. Otherwise, there is no need to complete this section.

Managing Unemployment Taxes

Businesses have many tax responsibilities, such as paying unemployment taxes. FUTA tax payments need to be recorded with the IRS, which is why employers have to file Form 940 on time. Thus, the government verifies that employers met their obligations.

Most employers have to pay both FUTA and SUTA taxes. Paying FUTA taxes and reporting them on Form 940 is fairly straightforward, but employers have to understand how state and federal payments work together. States can have their own rules for which businesses have to pay SUTA taxes. They can also have a different payment schedule, different payment deadlines, and different reporting forms.

Calculating the unemployment tax for both the federal and state authorities can be time-consuming and confusing. However, automated tax filing helps employers effectively manage filing Form 940 and any related state form, while remaining compliant with all tax requirements. As a result, employers can pay their quarterly payments on time and accurately file Form 940.

Simplify and automate tax filing and focus on running your business, while avoiding penalties and reducing tax risk.