As an employer, it’s important to familiarize yourself with Form 940. This form is used to report Federal Unemployment Tax Act (FUTA) tax, which provides funds for paying unemployment compensation to workers when they lose their jobs. Most employers are required to pay federal and state unemployment tax, as this tax is not collected or deducted from employees’ wages. However, you are credited for the amounts you pay in to your state unemployment fund.

The FUTA tax applies to the first $7,000 you pay each employee during the calendar year, minus any payments that are considered exempt. This applies to all full-time, part-time, and temporary employees. If you have a business partnership, your partners are exempt.

Here are two questions to help you determine whether you need to 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?

If you answered “yes” to either of these questions, you’re required to file Form 940.

How do you determine your FUTA tax liability? If you meet the requirements, you must pay FUTA tax (at a tax rate of 6%) on the first $7,000 paid to each employee during the calendar year, excluding any exempt payments.

When does your FUTA tax need to be deposited? Form 940 applies to a calendar year; however, you may need to deposit the FUTA tax before filing your return. For example, if your FUTA tax is more than $500 in the calendar year, you’re required to deposit at least one quarterly payment. If it’s $500 or less within a quarter, you can carry it over to the following quarter. Continue to do this until your cumulative tax is more than $500, which is when you must deposit your tax for the quarter. Also, make sure to deposit your FUTA tax before the last day of the month after the quarter ends.

Any time you make federal tax deposits, you must use the Electronic Federal Tax Payment System (EFTPS). All deposits must be submitted by 8 p.m. Eastern time on the day before your tax deposit is due in order to be considered on time. If you aren’t able to make your deposit using the EFTPS, you can submit a same-day wire deposit to the Federal Tax Collection Service.

In order to avoid penalties or interest from late payments, pay your tax by the due date, and file a completed Form 940; make sure every page or attachment includes your business name and EIN. You should also figure out your FUTA tax before any adjustments and calculate adjustments for your state unemployment tax payments. State unemployment taxes can make things more complicated, so if you need professional advice, SLD is here to help.

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