Who Else Wants to Understand The IRS Form 940?

If you are an small business owner with payroll, you are probably are familiar with the IRS form 941. That return you have to file quarterly. Many business owners are not as familiar with the Form 940. This is the form for reporting your Federal Unemployment Taxes. This form is filed annually, not quarterly, although you are required to make the 940 deposits quarterly if the balance for that quarter is over $500. Use the same 8109 form you use to deposit your 941 taxes just fill in the oval for 940.

If the amount of your FUTA tax is under $500 you can wait until the next quarter's deposit is due and add the previous quarters balance to the current quarter. When computing your tax remember that only the first $7000 in wages per employee is subject to the FUTA tax.

You compute the tax due by multiplying the rate times the total payroll for that quarter that is subject to the tax. The rate is normally 6.2% but is reduced by the State Unemployment Tax you pay. If you are eligible for the full credit, then your rate is only .8%.

Example:
Payroll for 1st Quarter 2009
Employee A $5000
Employee B $8000
All $5000 of employee A's wages are subject to FUTA tax
only $7000 of employee B's wages are subject so the total amount subject to the tax is $12,000. If you qualify for the full state credit, multiply
12,000 x .008 = $96. Your balance is under $500, so no balance for the quarter is due. (Note: the 7,000 is the max for the year not the quarter, so for any employee with wages over 7,000 in the 1st quarter, none of their wages for the other 3 quarters will be subject to the tax)

See the Instructions for form 940 to learn how to compute how much, if any of the state credit you are eligible for. You are required to have paid your state unemployment tax by the due date of the 940 to be eligible for the credit. This return is usually due the 2nd of Feb the following year. If your total balance for the year is $500 or less, you can send the payment in with your 940 return.

If you need additional help in completing this form or computing your FUTA taxes, contact a tax professional.