If your business has employees and you paid a total of more than $1500 last year, then you must file IRS Form 940 by January 31. IRS Form 940 is Employer’s Annual Federal Unemployment (FUTA) Tax Return. The form is due once a year, and it’s very easy to fill out and submit. There are a few ways to pay your FUTA, and the FUTA tax rate is not that high: .6%. That’s just over half of one percent. Plus, you won’t pay that on more than $7000 because there’s a limit on the FUTA tax.
Therefore, if you pay total wages of $40,000 for the year, FUTA tax will be $42. If you pay total wages of $30,000 your FUTA tax is still $42. Only if your total wages to all employees is less than $7000 will you less in Federal Unemployment Tax.
There are also a few other adjustments to be made to the formula: sometimes employee payments are exempt from FUTA. These would be:
- Fringe Benefits
- Group term life insurance
- Retirement or Pension payments
- Dependent Care
The total amounts paid to all employees will be entered in Part 2 (Adjustments to FUTA tax), line 4. You will subtract these amounts from your taxable FUTA wages.
Another adjustment concerns state unemployment taxes. Sometimes wages are exempt from State Unemployment tax. In this case, the Feds make you pay more FUTA tax. This is in Part 3 of IRS Form 940. You will take any wages that were exempt from state wages and multiply by .054. That’s almost 5 1/2 %, so it seems like it’s going to be quite a bit. But remember, the most you’re paying in FUTA tax is $42! The most the state adjustment can be, therefore, is $2.27. Nothing to worry about!
IRS Form 940 Schedule A
One last adjustment is Credit Reduction. If your state borrowed money from the Feds and hasn’t paid it back, you as a business owner and wage-payer must pay it back! So, if you live in a state that hasn’t paid its bill, you’ll have to fill out and submit IRS Form 940 Schedule A. Find your state and keep your fingers crossed that the multipier is zero! Take a look and find your state. If the multiplier is more zero, you’ll have to add that amount to the FUTA tax you owe.