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How to Complete Form 940 for Federal Unemployment Taxes

The previous article discussed the legal basis for the federal unemployment (FUTA) tax, as well as the tax rate and the credits that affect the tax rate. This article will focus on how to complete Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return .

How Do State Unemployment Taxes Affect the Federal Form 940?

The Federal Unemployment Tax Act (FUTA) established a joint state-federal program for providing partial wage replacement payments to workers who involuntarily lose their jobs. Therefore, an employer must provide information on Form 940 regarding the payment of state unemployment taxes (SUTA).

On Line 1 of Form 940 an employer must indicate whether it was required to pay SUTA in only one state or multiple states. (See Exhibit A below.) If the employer was required to pay unemployment in more than one state, it must check the box on Line 1b and check the boxes for each state to which it paid SUTA taxes in Part 1 of Form 940, Schedule A.

The previous article discussed credit reduction states. In 2009 the only credit reduction state was Michigan, but in November 2010, Indiana and South Carolina were added to the list. If an employer paid wages in any of those states, it must check the box on Line 1 and complete Part 2 of Schedule A. (See Exhibit B below.)

Calculating the Base FUTA Tax

Part 2 of Form 940 is used to calculate the FUTA tax before any adjustments are made. Only the first $7,000 of each employee’s wages is subject to the FUTA tax, so this section of the form is used to calculate taxable FUTA wages.

On Line 3 an employer must report all payments made to all employees. This total should be reconciled to the sum of wages reported on Line 1 of Form 941 for each of the four calendar quarters. It includes all compensation paid to employees, as well as all taxable fringe benefits.

Certain payments, particularly certain fringe benefits, are not subject to the FUTA tax. According to page 6 of the Instructions for Form 940. “some payments are exempt from FUTA tax because the payments are not included in the definition of wages or the services are not included in the definition of employment.” The most common payments that are exempt from FUTA tax are the following:

  • Contributions to accident or health plans for employees
  • Reimbursements for qualified moving expenses
  • Section 125 cafeteria plan benefits
  • Group term life insurance
  • Retirement and pension plan contributions
  • Dependent care payments
The total for all payments that are exempt from FUTA tax should be entered on Line 4 of Form 940, and the appropriate check boxes checked to indicate the type of payments that are excluded.

Since only the first $7,000 of each employee’s compensation is subject to the FUTA tax, any payments in excess of $7,000 should be totaled and entered on Line 5. Line 6 is the subtotal of

all payments that are not subject to the FUTA tax.

Line 7 is the difference between Line 3 and Line 6, and it represents the total wages subject to the FUTA tax. The amount on Line 7 is multiplied by the effective tax rate (0.8%) to calculate the base FUTA tax before adjustments, and the tax amount is entered on Line 8.

Calculating Adjustments to the FUTA Tax

An employer only has to pay the base FUTA tax if all of the wages reported on Line 7 were also subject to the employer’s SUTA tax. If all of these wages were not subject to SUTA tax, then the employer cannot claim the normal credit. In that case, the wages on Line 7 should be multiplied by the normal credit (5.4%), and the total entered on Line 9.

If the employer paid wages in a credit reduction state, as described above, Part 2 of Schedule A must be completed, and the total from Line 3 on Schedule A should be entered on Line 11 of Form 940.

The adjustment calculations become more complex if either of the following conditions applies:

  • Some of the taxable FUTA wages were excluded from state unemployment tax, and/or
  • Any of the state unemployment taxes will be paid after the due date for filing Form 940.
If either condition applies, the employer must complete the worksheet on page 8 of the Instructions for Form 940 and enter the amount on Line 7 of the worksheet on Line 10 of Form 940. (See Exhibit C below.)

After any adjustments have been calculated, they are added to the base FUTA tax on Line 8, and the total is entered on Line 12.

Determining the FUTA Tax Due with Form 940

Whether or not a payment is due when Form 940 is filed depends on how much the employer has deposited in FUTA taxes during the year. If the total tax on Line 12 is more than $500, then the liability for each quarter must be reported on Lines 16a through 16d, and the total on Line 17. Line 17 must equal Line 12.

The total that has actually been deposited during the year, including any credits from prior years, is reported on Line 13 and subtracted from Line 12. If Line 13 is less than Line 12, then there is a balance due. The entire balance due may be paid by federal depository, or if it is less than $500, it may be paid by check with the return.

If Line 13 is greater than Line 12, then a refund is due. The employer should indicate whether the amount should be refunded or applied to the employer’s next return.

File Form 940 on Time

If an employer follows the directions above, it can file Form 940 each year in a timely fashion. By paying all state and federal unemployment taxes on time, the employer can avoid penalties and interest.

Category: Taxes

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