What is the FUTA tax?
There are three types of payroll and employment taxes. There are withholding taxes, which are taxes paid by employees on their income, Employer taxes, which the employer is responsible for paying the entirety of, and shared taxes, which are taxes split between the employer and the employee. The FUTA tax is an employer tax, which means the business pays the full amount of it. It’s calculated based on a percentage of the wages paid to each employee. The federal government decides on the percentage rate. As of the past few years, the standard FUTA tax rate has been 6%. It’s important to remember that businesses only pay FUTA tax on the first $7,000 paid to each employee. That means the maximum amount a business will ever be liable for is $420 per employee, which is 6% of $7,000.
What is Form 940?
When you hire a W-2 employee and start running payroll, there will be new filing responsibilities for your business. Among those responsibilities include employment taxes and payroll forms. One of those forms, in particular, is IRS Form 940. This form is also known as the Employer's Annual Federal Unemployment Tax Return. Here’s what you should know about form 940.
Form 940 is a document that the IRS collects annually from employers. It is designed to keep both the IRS and businesses on the same page regarding the Federal Unemployment tax paid and owed. When you look at the form, you’ll see that employers have to report the wages they paid to full-time and part-time (W-2) employees throughout the year. Businesses only owe FUTA tax on the first $7,000 paid to each employee per year, excluding any exempt payments. To determine how much the business owes to the IRS, the corresponding FUTA tax is calculated multiplying taxable wages by the applicable rate.
In the United States, employers are required to pay into Federal Unemployment benefits for their employees. The fund enables employees to collect compensation if they are laid off due to lack of work. When calculating the amount of FUTA tax an employer owes, the IRS uses form 940 and requires most employers to file yearly. The form allows both individual employers and the IRS to keep track of FUTA tax owed and paid throughout the year.
Who must file Form 940?
Most employers are required to submit Form 940. If you’ve had one or more W-2 employees for at least 20 weeks out of the past year, or if you’ve paid $1,500 or more to any W-2 employee, you’re required to pay FUTA tax and file Form 940. Nonetheless, there are exceptions to this rule noted by the U.S. Chamber of Commerce. Non-profits, Indian tribal governments, religious organizations, and other 501(c)(3) accredited firms may not be required to pay this tax. One additional exemption is businesses that only work with independent contractors (1099-MISC) and not W-2 employees. If you’re unsure whether you have to pay FUTA tax, you can consult with a tax professional to get more clarity.
How to fill out Form 940
First, you need to know the current FUTA tax rate, the maximum FUTA threshold, the total salary paid to employees, the number of employees, the amount of payments exempt from FUTA tax, and how much you’ve paid in state unemployment tax for the year. Then, you multiply the FUTA tax rate with the number of your employees and the maximum tax threshold. Any FUTA payments you’ve already made during the year may then be subtracted to determine the remaining amount owed. Be aware that most employers have to pay state unemployment tax (SUTA) as well. Sometimes you can claim the SUTA tax you’ve paid as a credit off of your FUTA tax bill.
Hiring W-2 employees is a big step to take when starting your business. It’s essential to know how to manage the taxes that come along with it. Be sure to take care of your FUTA tax responsibilities by filing Form 940.
