Form 940 and FUTA: the annual federal unemployment tax return

The Federal Unemployment Tax Act, or FUTA, funds the federal part of the unemployment system. Employers pay it. It is not withheld from employees. Form 940 is the annual return that reports the wages subject to the tax and the tax due.

The FUTA rate is 6.0 percent on the first $7,000 of each employee's wages for the year. Employers who pay their state unemployment tax on time generally get a credit of up to 5.4 percent, which lowers the effective rate to 0.6 percent, or $42 per employee at the wage base. Some states carry a credit reduction when they owe the federal government for unemployment loans, which raises the rate for employers in those states.

Employers deposit FUTA quarterly if the amount owed exceeds $500, and carry smaller amounts forward. The annual return is generally due January 31 after the year ends, with a later date available if all deposits were made on time. Check the current instructions for the exact dates.

Compare the wages on Form 940 with the payroll register. Identify wages that are exempt from FUTA, such as pay above the wage base and certain fringe benefits, and wages paid in more than one state. Compare the state unemployment payments you claim as a credit with your state returns, since the credit depends on them. Agree the deposits with the liability account.

Keep the return, deposit confirmations, and supporting reports for at least four years. They help resolve any notice about the credit or a deposit.

A company has 12 employees, each paid $60,000 a year in equal amounts, and it pays its state unemployment tax on time. Each employee earns $15,000 in the first quarter, which already exceeds the $7,000 wage base. FUTA wages are therefore $7,000 times 12, or $84,000, all in the first quarter. At the effective rate of 0.6 percent, the tax is $504. Because that is more than $500, the company deposits it by April 30. No further FUTA accrues for the rest of the year, because every employee is already past the wage base.

If the company is in a state with a credit reduction of 0.3 percentage points, the extra tax is $252 on the same wages. That amount is generally due when the return is filed. A payroll provider calculates it, but it is worth knowing what the number should be.