Understanding your tax obligations as an employer is crucial. One key aspect of this is the Federal Unemployment Tax Act (FUTA) tax. This federal tax, distinct from state unemployment taxes, requires employers to file Form 940 annually. Navigating the intricacies of FUTA can seem complex, but this guide breaks down the essential information to help you determine if you need to file and what your responsibilities are.
Who Needs to File Form 940? The General Rule
The most common scenario for FUTA tax liability falls under the general test. You’re generally required to file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, if you meet either of these criteria in the current year (2024) or the previous year (2023):
- Wage Threshold: You paid wages of $1,500 or more to employees in any calendar quarter.
- Employee Count: You had one or more employees for at least some part of a day in 20 or more different weeks.
This general rule applies to employees who are not considered household or agricultural employees. Remember to include all employees – full-time, part-time, and temporary – when counting. Partners in a partnership are not counted as employees for this purpose.
Alt text: Image of Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, highlighting the form title and IRS logo, used for reporting FUTA tax.
In cases of business sales or transfers during the year, each employer meeting the above conditions is responsible for filing Form 940 for the wages they paid. Unless you are a successor employer, do not include wages paid by the previous employer on your Form 940. For specific details on successor employer rules, consult the Form 940 instructions. If you anticipate no future FUTA filing liability, refer to the “Final: Business closed or stopped paying wages” section within the Form 940 instructions PDF provided by the IRS.
Special Cases: Household and Agricultural Employees
For employers of household employees and agricultural employees (farmworkers), different tests apply to determine FUTA tax obligations. Detailed guidance for these categories can be found in Section 14, Federal Unemployment (FUTA) Tax of Publication 15 (Circular E), Employer’s Tax Guide.
Household employers can also find valuable information in Publication 926, Household Employer’s Tax Guide and Topic no. 756, Employment taxes for household employees.
Agricultural employers should refer to Publication 15 and Topic no. 760, Reporting and deposit requirements for agricultural employers for specific rules related to Form 943 and deposit requirements.
Understanding the FUTA Tax Rate and Wage Base
The FUTA tax rate is set at 6.0%. However, it’s important to note that this tax applies only to the first $7,000 you pay to each employee as wages during the calendar year. This $7,000 limit is known as the federal or FUTA wage base. Remember that your state wage base might differ, depending on state regulations.
In many cases, employers who contribute to state unemployment funds are eligible for a credit of up to 5.4% of FUTA taxable wages when filing Form 940. If you qualify for the maximum 5.4% credit, your effective FUTA tax rate after the credit is reduced to just 0.6%. To receive the maximum credit, you must have paid your state unemployment taxes in full by the Form 940 due date, on wages that are also subject to FUTA tax, and your state must not be designated as a credit reduction state. Consult the Instructions for Form 940 for detailed information on calculating this credit.
Credit Reduction States: What You Need to Know
A credit reduction state is a state that has not repaid its federal loans used to fund unemployment benefits. The Department of Labor manages this loan program and annually identifies credit reduction states. For the latest information, see FUTA credit reduction on the IRS website.
If you pay wages that are subject to unemployment tax laws in a credit reduction state, the credit you can receive for your state unemployment tax payments will be reduced. This reduction leads to a higher federal unemployment tax liability when you file Form 940 and Schedule A (Form 940), Multi-State Employer and Credit Reduction Information. Schedule A is mandatory if you paid wages in more than one state or in any credit reduction state.
Alt text: Image of Schedule A (Form 940), Multi-State Employer and Credit Reduction Information, form used to report wages paid in multiple states or credit reduction states for FUTA tax purposes.
Filing Deadlines for Form 940
The standard due date for filing Form 940 is January 31st following the calendar year. However, you can extend this deadline to February 10th if you have deposited all your FUTA tax liabilities on time throughout the year. If the due date falls on a Saturday, Sunday, or legal holiday, the filing deadline is shifted to the next business day. Legal holidays are defined as any legal holiday in the District of Columbia. Refer to Publication 15, Section 11, for a list of legal holidays and more details on deposit due dates.
Depositing Your FUTA Tax: When and How
Even though Form 940 covers the entire calendar year, you may need to deposit your FUTA tax payments throughout the year. If your total FUTA tax liability for the year is expected to be more than $500, you must make at least quarterly deposits.
If your FUTA tax liability for a quarter is $500 or less, you can carry it forward to the next quarter. Continue this process until your cumulative liability exceeds $500. Once it does, you must deposit the FUTA tax for that quarter by the last day of the month following the quarter’s end.
For example, if your cumulative FUTA tax exceeds $500 during the third quarter (July-September), the deposit is due by October 31st. If your fourth quarter liability (plus any carried-over amounts) remains at $500 or less, you have the option to either deposit the amount or pay it with your Form 940 by January 31st. If a deposit due date falls on a non-business day, the deadline is extended to the next business day.
For all federal tax deposits, including FUTA tax, electronic funds transfer (EFT) is mandatory. You can make payments through your IRS business tax account, IRS Direct Pay for businesses, or the Electronic Federal Tax Payment System (EFTPS). For detailed EFTPS instructions, see Publication 966, Electronic Federal Tax Payment System, A Guide to Getting Started PDF. Publication 15 also provides further information on deposit regulations.
By understanding these guidelines, you can confidently manage your FUTA tax responsibilities and ensure compliance with Form 940 filing and deposit requirements.
