What is IRS Form 940? Here’s what it means

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. We break it down for you here.

Matt Redler
December 14, 2021

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. 

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.

If you employ globally, there are different rules

What you just read above applies to the United States. But if you want to hire globally––and find the best talent in the world––there are different rules to follow. That’s what we’re here for.

Using Panther, you can automate your global payroll process so you don’t have to worry about the nitty-gritty of payroll taxes in the United States or abroad. We’ve spent tens of thousands of hours researching and building this stuff and would love to show you how Panther works.

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