Business owners who have employees are required to fill out and submit IRS Form 940 every year along with their annual taxes.
What is FUTA?
FUTA, along with state programs, provides unemployment funds for employees who have lost jobs. Unemployment provides employees with financial assistance while they are searching for new employment. FUTA funds come from taxes that employers pay on each employee.
The standard FUTA rate is 6.0% on the first $7,000 paid to the employee. States usually receive a tax credit of 5.4%, meaning employers pay 0.6%; however, some states that were unable to meet their unemployment obligations and had to borrow federal funds face a reduced FUTA credit. Business owners in these credit reduction states face higher rates until the state satisfies their loan to the federal government.
Who must file Form 940?
Any business must file the Form 940 if they paid wages of at least $1,500 to any employee during the standard calendar year. Businesses must also file Form 940 if they had any employee (temporary, part-time, or full-time) work any time during 20 or more weeks. This means an employee working two hours every Wednesday for 20 weeks throughout the year (consecutively or not) must be reported on a Form 940.
If a businesses is not not liable for paying FUTA taxes for a given year because they did not pay employees, they still need to submit a form stating they did not make any such payments.
Agricultural businesses are often handled slightly differently than other businesses. In the case of FUTA taxes and Form 940, those who paid out cash wages of at least $20,000 must file a Form 940. Farmers must also file Form 940 if they employed 10 or more workers during any part of the day for 20 different weeks or more.
Wages paid to foreign citizens who were legally in the U.S. to perform temporary work are not subject to this tax. These wages do not have to be reported on a Form 940.
Anyone who employs a nanny, cook, or other household workers must pay FUTA taxes. The definition of “household employee” also includes anyone who performs household work in a college fraternity, sorority, or college club. Generally, those who only employ a household employee will file Form 1040, Schedule H. However, employers with both business and household employees can combine the two types of employees on a Form 940.
There are a few different exemptions from the FUTA tax. Tax-exempt organizations do not need to file Form 940. Government entities, both state and local, also do not have to file Form 940. Finally, Indian tribal governments may be exempt from FUTA tax if the tribe has participated in their state’s unemployment system for at least a year. They must also comply with all state unemployment laws that apply.
When is Form 940 due?
Form 940 is due January 31 of every year. However, if that date falls on a weekend, as it will in 2015, the due date is moved to the following Monday. For 2015, the due date for Form 940 is February 2.
Depositing FUTA taxes
While small businesses may pay their entire FUTA tax at once, larger businesses may need to make quarterly deposits. The general rule of thumb is that if the FUTA tax due is greater than $500 for one quarter, then that tax needs to be paid by quarter-end. If the FUTA tax due is less than $500, it can be rolled over to the next quarter.