The Unemployment Compensation (UC) program pays benefits to eligible employees who have lost their jobs. Employers in the United States are required to pay taxes that fund federal unemployment insurance programs on behalf of their employees. The Federal Unemployment Tax Act (FUTA) requires employers to make payments to the unemployment programs and to report that tax annually to the Internal Revenue Service (IRS) on Form 940.
Why do employers file Form 940?
Employers file IRS Form 940 to report the taxes that have been paid to fund the federal portion of unemployment programs. They file this form because they are required by law to report taxes to the IRS.
Tax compliance is one of the many risks of remote employment. As an employer, you need to make sure that you withhold the appropriate taxes from employees and make employer contributions to various programs, such as Social Security and unemployment compensation. To help mitigate some of the risks of remote employment, you can partner with an employer of record to ensure compliance.
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What is FUTA tax?
FUTA tax funds the federal share of unemployment insurance that pays unemployment benefits to eligible employees when they become unemployed. FUTA tax is separate from the State Unemployment Tax Act (SUTA) tax, which is a state payroll tax that funds state-level unemployment insurance programs.
Certain entities are exempt from paying FUTA tax and do not have to file Form 940. Exempt entities include:
- State government employers
- Indian tribal governments
- Tax-exempt organizations
Most employers need to pay quarterly FUTA tax if they had at least one employee during any 20 weeks in the current or previous year and have paid at least $1,500 to employees in any quarter. FUTA tax is only paid by employers. The tax is not withheld from employees’ earnings, nor is it paid by employees when they file their taxes.
FUTA taxes are calculated on the first $7,000 paid to each employee in the quarter. The FUTA rate for 2022 is 6%. To calculate the total liability for FUTA, find the eligible wages for each employee. Since only the first $7,000 paid to each employee per quarter is subject to the tax, only add wages earned for each employee up to $7000. Add up each employee’s eligible wages and multiply by 6% to get the total tax liability for the quarter.
For example, if an employer has two employees, one who was paid $6,000 and one who was paid $8,000, only the first $7,000 of the second employee would be added. The calculation for the FUTA tax liability for that quarter would be:
($6,000+$7,000) × 0.06 = $780
Employers can take a tax credit for the SUTA taxes that they paid up to 5.4%. FUTA taxes are paid quarterly by employers in the month following the end of the quarter. If the liability is less than $500, it is carried over into the next quarter. After an employer has calculated their total FUTA liability over $500, they must transfer the tax payments via electronic funds transfer.
Making sure FUTA taxes are paid and filed properly is just one element of tax compliance for remote employers. Another part of compliance is ensuring paperwork is filled in properly with all the correct information such as the tax identification number (TIN), which includes employee identification numbers such as the Social Security number and employer identification number (EIN).
How does Form 940 work?
The 940 tax form works to provide employers documentation for their annual FUTA tax payments that the IRS requires to be filed every year. It is filled in by the employer with information on the taxes they’ve paid and mailed or filed electronically to the IRS.
Understanding the way taxes and tax forms works is one way to be sure your company is filing taxes properly. Proper tax filing and correct tax withholding mean your employees are paid properly, which is one way your company can stay out of legal trouble.
Where can I get Form 940?
You can download Form 940 online from the IRS website.
How to fill out Form 940
Instructions for Form 940 are available on the IRS website to assist you in properly filling out the form.
Form 940 has seven parts on two pages as well as an included payment voucher. Leave a line blank if the question does not apply. Follow the instructions on the form and make the necessary calculations, as shown in the example above.
Fill in the following information on the form:
- Part 1: Check boxes for state unemployment tax information
- Part 2: Determine the FUTA tax before adjustments to find the total taxable FUTA wages
- Part 3: Determine the adjustments — SUTA tax payments can be deducted up to 5.4%
- Part 4: Determine the FUTA tax and balance due or any over-payment — any payments made throughout the year will be deducted from the FUTA taxes owed, which will give you either the balance due or the amount of overpayment
- Part 5: Report the FUTA tax liability by quarter for liabilities over $500
- Part 6: Include any information about a third-party designee, if applicable
- Part 7: Sign and date both pages
Form 940-V is the included payment voucher, which you can send along with the payment if paying by mail. Fill in the following information on the voucher if paying by mail:
- Box 1: Enter your Employer Identification Number (EIN)
- Box 2: Enter the amount of the payment
- Box 3: Enter your business name and address
Properly processing payroll taxes correctly means more than just knowing how to fill in forms such as the FUTA 940 form. Payroll processing also entails accurately withholding taxes where applicable and making the correct employee and employer contributions. That means your employees are paid properly, and you may avoid lawsuits and other legal issues. Accurate calculation of payroll taxes can help employers can avoid the legal pitfalls of hiring and employing remote employees.
Where to mail Form 940
You can mail Form 940 to the IRS. The mailing address of the IRS to send Form 940 depends on where your company is located and whether you are mailing the form with or without payment.
The IRS encourages electronic filing. Your company can file the form electronically at the IRS website.
How Skuad can help you with Form 940
If you are an employer with an obligation to pay Federal Unemployment Tax, you’ll be required to fill and file Form 940 with the IRS every tax year. With Skuad, you get a comprehensive overview of the Federal Unemployment Tax Act (FUTA) and can easily request and file Form 940. To learn more, talk to our experts today!
An employer of record like Skuad can:
- Help you hire employees in over 160 countries worldwide
- Draft legally compliant employment contracts
- Hire local workers without your company needing a local entity
- Onboard your employees
- Process payroll and take care of timesheets and payslips
- Accurately process payroll taxes and employer tax contributions
- Ensure full compliance with local employment laws, immigration laws, and tax laws
Your company can take care of its entire global workforce on Skuad’s unified platform, seamlessly.
Who should file Form 940?
Employers in the United States should file Form 940 if they had at least one employee during 20 weeks of the current or previous year and have paid them at least $1,500 in wages during that time.
FUTA taxes are taxed at a rate of 6% for the first $7,000 paid to each employee during the quarter. Employers calculate their total tax liability and pay the taxes electronically in the month following each quarter. The total FUTA taxes paid during the tax year is reported on Form 940, which is due in January for the previous tax year.
Is Form 940 required?
Form 940 is a required tax form that employers must file to report their FUTA taxes to the IRS. Every employer is required to file a Form 940 if they were required to pay FUTA taxes and made FUTA tax payments in the previous tax year. Certain entities are not required to pay FUTA taxes and are not required to file Form 940.
Exempt entities are:
- State government employers
- Indian tribal governments
- Tax-exempt organizations
Is FUTA the same as 940?
FUTA is a type of tax and 940 refers to the IRS Form 940 on which the tax is reported.
The acronym FUTA stands for Federal Unemployment Tax Act. It refers to the federal law that imposes a tax on all American employers to help fund the Federal Unemployment Compensation (UC) program. This tax is also known as the “FUTA tax.”
Form 940 is the tax form that employers file annually that shows how much the employer paid in FUTA taxes for the tax year.
What is Form 940 used for?
Form 940 is used to report taxes that have been paid for the federal portion of unemployment insurance programs. Employers should fill out and file the annual FUTA tax form to the IRS.
Who pays for FUTA?
Only employers pay for the FUTA taxes that fund unemployment compensation for employees. Employees do not pay FUTA tax, do not have FUTA taxes withheld from their earnings, and do not have to file any tax forms for FUTA, such as Form 940.