When You May Pay FUTA Taxes with Form 940

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FUTA stands for Federal Unemployment Tax Act. It is an employer-paid tax. Employees do not pay this tax. Therefore, you do not withhold FUTA tax from an employee's pay.

If in any quarter during the calendar year, your FUTA tax has accumulated to more than $500, you are required to make a tax deposit.. However, if your accumulated FUTA tax liability for all four quarters of the calendar year (Q1 + Q2 + Q3+ Q4) totals $500 or less, you may pay the tax with Form 940.

The way this works is as follows:

If during any quarter during the calendar year the FUTA tax liability is $500 or less, carry the amount over to the following quarter. Then, add the amount carried over to the current quarter FUTA tax liability. Continue this carry over process. If the accumulated amount for all four quarters totals $500 or less, you may pay the tax with Form 940.

Note Only when the accumulated liability exceeds $500 (i.e. $501 or more) in any quarter are you required to make a tax deposit. The deposit must be made by the last day of the month following the month the liability exceeded $500. For example, if the $500 liability exceeded $500 during June (Q2), a deposit would be required by July 31.

Example:

  • Q1: FUTA liability: $30
  • Q2: FUTA liability: $40 + $30 (Q1) = $70
  • Q3: FUTA liability: $50 + $30 (Q1) + $40 (Q2) = $120
  • Q4: FUTA liability: $60 + $30 (Q1) + $40 (Q2) + $50 (Q3) = $180

The example shows that the accumulated FUTA tax liability for the entire calendar year is $180. Since the $500 threshold was not exceeded in any quarter, no deposit was required. You may pay the tax by mailing your payment along with Form 940.

FUTA Tax Rate:

For most employers, the FUTA rate, after the 5.4% credit offset, is .6% (.006). The tax applies to only the first $7,000 of gross wages paid to each employee. This means, the maximum FUTA tax per employee is $42 (.006 x $7,000).

For example, if an employee's gross wages for the year totaled $30,000, the maximum FUTA tax for that employee would be $42 (.006 x $7,000). If another employee's gross wages for the year totaled $5,000, the FUTA tax for that employee would be $30 (.006 x $5,000). The total FUTA tax liability in this example is $72, which you may pay with Form 940.

NoteThe FUTA tax levies a federal tax on employers covered by a state’s Unemployment Insurance Program. The standard FUTA tax rate is 6.0% (.06) on the first $7,000 of wages paid to each employee that is subject to the FUTA tax. However, employers generally receive a credit of 5.4% when they file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. The 5.4% credit lowers the standard FUTA tax rate from 6.0% (.06) to 0.6% (.006).

This means, the maximum FUTA tax rate per employee is 0.6% (6.0% - 5.4% = 0.6%) and the maximum tax per employee is $42 (.006 x $7,000).

The funds from the FUTA tax create the Federal Unemployment Trust Fund, administered by the United States Department of Labor (DOL). States may sometimes have to borrow funds from the Trust Fund to meet its state unemployment benefits. If the state does not repay the loan within a certain time frame, that state becomes what is called a credit reduction state. This means, the 5.4% credit that is normally allowed to the state, is reduced. This results in the affected state having to pay a higher FUTA tax, which is used to pay down the amount borrowed from the Trust Fund.

Pay FUTA Taxes Online

You can also pay FUTA taxes online and get confirmation of your payment using the IRS Electronic Federal Tax Payment System (EFTPS).

To enroll in EFTPS, call 1-800-555-4477 or visit the EFTPS website at www.eftps.gov.

If your business is new, the IRS will automatically pre-enroll you in EFTPS when you apply for an Employee Identification Number (EIN) .

  • Getting your EIN online is quick, easy, and you can download it immediately.
  • Keep the printout for your records.

cautionTo make your EFTPS payment on time, make sure you initiate the transaction at least one business day before the deposit due date.

File your personal and small business taxes (Schedule C)