Employers needs to make themselves familiar with Form 940, used to report the Federal Unemployment Tax Act tax. The FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs.
Most employers pay both federal and state unemployment tax, which provide benefits to people who have lost their jobs. The unemployment tax is not collected or deducted from employees’ wages. You are credited for amounts you pay to a state unemployment fund.
The FUTA tax applies to the first $7,000 you pay each employee during a calendar year after subtracting any payments exempt from FUTA tax. If you answer “yes” to either of these questions, you must file Form 940:
- Did you pay wages of $1,500 or more to employees in any calendar quarter in the past two years?
- Did you have one or more employees for at least some part of a day in any 20 or more different weeks in either of the past two years?
This applies to all full-time, part-time and temporary employees, but not to partners if your business is a partnership.
How do you figure your FUTA tax liability? You owe FUTA tax on the first $7,000 you pay to each employee during the calendar year after subtracting any payments exempt from FUTA tax. The FUTA tax rate is 6%.
When must you deposit your FUTA tax? Although Form 940 covers a calendar year, you may have to deposit your FUTA tax before you file your return. If your FUTA tax is more than $500 for the calendar year, you must deposit at least one quarterly payment. If your FUTA tax is $500 or less in a quarter, carry it over to the next quarter. Continue carrying your tax liability over until your cumulative tax is more than $500. At that point, you must deposit your tax for the quarter. Deposit your FUTA tax by the last day of the month after the end of the quarter.
You must use electronic funds transfer to make all federal tax deposits, using the Electronic Federal Tax Payment System. For an EFTPS deposit to be on time, you must submit it by 8 p.m. Eastern time the day before the date the deposit is due. If you fail to submit the deposit transaction by EFTPS on time, you can still use a same-day wire payment through the Federal Tax Collection Service.
To avoid penalties and interest, deposit and pay your tax when it’s due and file your completed form. Make sure your business name and EIN are on every page of the form and any attachments.
Determine your FUTA tax before adjustments including compensation, fringe benefits, retirement/pension and tips. Calculate adjustments for state unemployment tax payments.
When state unemployment taxes are figured in, the calculations can get complicated, so be sure to get professional advice.
Questions? Contact an MCB Advisor at 703-218-3600 or click here. To review our business planning articles, click here. To learn more about MCB’s tax practice and our tax experts, click here.
Subscribe to the MCB Blog and get all new MCB blog posts sent directly to your inbox.
©2020