What you need to know about FUTA Taxes and Form 940

Paying and reporting in accordance with the Federal Unemployment Tax Act.

There are many deadlines to keep up with this time of year, and many of them are around the corner. With the year-end deadline for Forms W-2, 1099-NEC, Form 941 only a few days away on February 1, 2021, we understand how busy businesses and tax professionals are right now. 

To help you complete your required filing as quickly and easily as possible, we are bringing you the information you need about Form 940 and your FUTA taxes. 

The deadline to file Form 940 is February 1, 2021, however, employers who have made timely FUTA deposits can file Form 940 on February 10, 2021.

What is Form 940?

Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return. The 940 is designed to report businesses’ Federal Unemployment Taxes, in accordance with the Federal Unemployment Tax Act. The taxes collected are used to fund unemployment compensation payments.

Who must file Form 940? 

Employers who meet either of the following criteria must file Form 940 and pay FUTA taxes:

Employers who paid $1,500 in wages to employees during the 2019 and 2020 tax years 

Businesses that employed workers (full-time, part-time, temporary) for any 20 weeks of the 2019 or 2020 tax years. 

According to the IRS, If you employ household workers, you must pay FUTA taxes on wages that you paid to your household employees only if you paid cash wages of $1,000 or more in any calendar quarter in 2019 or 2020.

Employers in the agriculture industry should file and pay FUTA taxes if they paid cash wages of $20,000 or more during any quarter of the previous or current tax year or employed 10 or more farmworkers during the same time period. 

Important Information

It is important to note that tax-exempt organizations are not subject to FUTA taxes for their employees. Neither are local or state government employers or Indian Tribal Organizations.

Employers must pay a tax rate of 6% on the first $7,000 of wages that each of their employees makes. If state unemployment taxes (SUTA) was paid on-time, the FUTA tax can be reduced to 0.6 percent.

Business owners should also be aware that if they have closed their business or have not paid wages during the course of the tax year, they must indicate so by checking “d. Final: Business closed or stopped paying wages” or “c. No payments to employees in 2020”. 

How do you complete Form 940? 

To complete this 7 part form, you will need the following information:

  • All the wages that you have paid to employees
  • Basic business details like name, address, and EIN
  • FUTA liability payments

TaxBandits helps you calculate the credit reduction for your state, if applicable, FUTA tax, your balance due, or overpayment during the e-filing process. 

What is a credit reduction state? 

If a state has an outstanding unemployment benefits loan from the federal government, it is considered a credit reduction state. Businesses who must pay unemployment taxes to this state will pay a reduced rate until the state has repaid its balance to the IRS. 

The only credit reduction state for the tax year 2020 is the U.S. Virgin Islands or USIV. The reduction rate is .03, which ends up being 3%. Any employers who pay wages to an employee(s) residing in USVI will need to take this reduction into when calculating their total credit reductions. 

Remember, if you employ workers who live in different states, you should complete Form 940, Schedule A. You should also attach Schedule A if you are operating in a credit reduction state. Learn more in this blog

Filing Form 940 may seem complicated, but with TaxBandits, it is simple! Our filing process is quick and easy to follow. Plus, our excellent U.S based support team is available to answer your questions via phone, email, or live chat. 

Ready to get started? Create your free TaxBandits account today!

Form 940

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