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2 min read

What is IRS Form 940?

What is IRS Form 940?

Definition

Almost every employer has to pay federal unemployment taxes. And if you’re one of those employers, you’ll file the IRS’ Form 940 once per year to report those taxes to the federal government. It’s an easy form that takes less than 10 minutes to complete––we’ll cover the steps below.

There’s a big reason why you need to file Form 940:

  • The standard Federal Unemployment Tax (FUTA) is 6.0% on the first $7,000 in wages per employee. That comes out to $420 per employee per year.
  • But most businesses qualify for the FUTA Credit Reduction, which takes that 6% down to 0.6%. So instead of paying $420 per employee, you’re paying $42. This adds up quickly.

But you need to file Form 940 to receive the tax credit. It’s an easy way to make sure you’re maximizing your tax savings.

IRS Form 940

Form 940: Cheat sheet

  • It’s due by January 31st each year. Or February 10th, if you’ve already made all of your payments on time.
  • You probably qualify for the 5.4% reduction. Which means you’ll most likely pay an effective 0.6% in FUTA taxes.
  • Only employers pay unemployment tax. Unlike other payroll taxes, you can’t deduct unemployment from your employee’s wages.

How to calculate your FUTA taxes

Most employers qualify for the 5.4% credit, which means your effective tax rate on Form 940 will be 0.6%. Here’s a simple formula, assuming you pay all your employees at least $7,000 per year:

(Number of employees x 7,000) x (.006) = FUTA taxes owed

For example:

(15 employees x 7,000) x (.006) = $630

Why $7,000? It’s the federal wage base for unemployment taxes. This means that once you’ve paid an employee at least $7,000, you don’t pay unemployment taxes on the rest of their income for that year.

If you paid an employee less than $7,000 in a year, you’ll multiply the amount you paid them (say, $3,000) by .006 to get your final number for that employee.

Who doesn’t qualify for the 5.4% credit:

  • If you haven’t paid state unemployment tax on time and in full.
  • You are in a credit reduction state (in 2021, the only credit reduction area is the Virgin Islands. But this will change.)

To do the official calculations, just walk through the steps on the official Form 940. There are a few extra steps that we cut for this article, but they’ll get you to the same result as the simplified solution above.

When Form 940 is due (and where to send it)

Form 940 is due by January 31st each year. But if you’ve paid all your unemployment taxes on time and in full, you have until February 10th. Here’s when your federal unemployment taxes are due each year:

Q1: By April 30th.
Q2: By July 31st.
Q3: By October 31st.
Q4: By January 31st.

The best way to pay this tax is through EFTPS. When you’re done filling out the form, go to the IRS’ official webpage to find the exact address you’ll mail it to. Remember that you’ll mail the form to different addresses based on whether or not you’ve included payment with your form.

At RemotePad, Lech draws on his professional experience to write about employment taxes and payroll (both remote, and in-office). Lech holds a Bachelors’ degree from the University of Kent, a Master of Arts (MA) from Kings College London, and professional payroll and tax qualifications. He has 20 years experience advising on all manner of tax and business planning matters.

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