Preparing Your Form 940 for Unemployment Taxes

February 25, 2017
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As an owner of a small or medium-sized business, you’re faced with plenty of responsibilities, and reporting and paying unemployment tax – or FUTA tax – is one of them. With the FUTA tax, you must pay a rate of 6% on the first $7,000 of an employee’s wage. The funds generated from this tax provide unemployment compensation for individuals who are in-between jobs.

Each year, you must report and pay this tax using Form 940.To complete this form correctly, accurate recordkeeping throughout the year is a must, and using a payroll service such as ours helps streamline the process. Once you’ve gathered all your payroll information, follow this tutorial.

Step 1 – General Information

Enter your Employer Identification Number (EIN), name, trade name (if necessary), and business’s address. If you don’t have an EIN, you can apply for one online.

In the “Type of Return” section, check any applicable boxes. If you’re making changes to a previous return, check box a. Check box b if you’re a successor employer and reporting wages paid before you acquired a business (see Form 940 instructions for more details). If you did not pay any employees during the year, check box c, then skip down to Part 7 to sign and date the form. If your company went out of business or stopped paying wages, check box d.

Step 2 – Part 1

If all your employees are situated exclusively in one state and you were required to pay that state’s unemployment tax (SUTA), enter the state’s abbreviation on line 1a.

For line 1b, check the box and complete Schedule A (Form 940) if you have employees in multiple states and you were required to pay state unemployment tax for one or more of those states.

You must also complete Schedule A (Form 940) and check line 1c if you paid wages in a credit reduction state. This is a state that borrowed money from the federal government to pay for unemployment benefits but has yet to repay the loan. Employers usually pay more FUTA tax if they paid wages in credit reduction states.

Step 3 – Part 2

For line 3, put down the total amount of wages you paid to all your employees during the year.

Then, enter the amount of payments exempt from FUTA tax on line 4. These exempt payments include certain fringe benefits, group term life insurance, contributions to retirement/pension plans and dependent care. Check the Form 940 instructions for more details about these payments.

Line 5 asks to specify the total of payments made to each employee in excess of $7,000 – the FUTA tax wage base. After subtracting line 4 from line 3, subtract this result over $7,000 and put down the sum on line 5.

To get your subtotal of the excess wages not subject to FUTA tax, add lines 4 and 5 together and enter the result on line 6.

For line 7, subtract line 6 from line 3, which will determine your total taxable FUTA wages. Then, multiply line 7 by 0.0006 (.6%) and input the sum on line 8. This is your FUTA tax liability before adjustments.

Step 4 – Part 3

This section asks you to calculate any adjustments for state unemployment taxes. For line 9, multiply line 7 by 0.054 (5.4%) if all your taxable FUTA wages you paid were not subject to state unemployment taxes.

If some if your taxable FUTA wages were excluded from state unemployment taxes or you paid any unemployment tax late, complete the worksheet in the instructions. Once you’re done, put down the amount from line 7 of the worksheet on line 10 of Form 940.

If you completed Schedule A because you paid wages in a credit reduction state, refer to the total credit reduction you calculated on Schedule A and enter the amount on line 11.

Leave Part 3 blank if none of these adjustments are relevant to you.

Step 5 – Part 4

Figure your total FUTA tax after adjustments by adding lines 8 to 11 together and input the sum on line 12.

If you made an estimated tax payment for the year or designated to have an overpayment from the prior year applied to this year’s return, specify the amount on line 13.

To calculate your balance due, subtract line 13 from line 12 and enter the result on line 14. If the balance is more than $500, you’ll have to deposit that amount via Electronic Federal Tax Payment System (EFTPS). If it’s less than $500, you can send your payment along with your Form 940.

If line 13 is more than line 12, this means you overpaid your taxes. Put down the excess amount on line 15 and specify whether you want your money to be refunded to you or applied to your next return.

Step 6 – Part 5

You only have to fill out this section if your yearly amount was more than $500. If so, report your tax liability – not the amount you deposited – for each quarter in the corresponding boxes.

Step 7 – Parts 6 and 7

You can elect a third party – like one of our dedicated accountants – to talk to the IRS about your return on your behalf. Put down the designee’s name, phone number and five-digit PIN number. After that, sign and date the form and send it to the IRS by January 31.

Work with the Experts

1-800Accountant is a virtual accounting firm merging the convenience of technology with live support from real professionals, making taxes easy and personable for individuals and small businesses. Focus on growing your bottom line while our team of accountants, certified public accountants, and enrolled agents perform the heavy lifting – tax advisory and preparation, payroll, bookkeeping, and audit defense. For professional, year-round services at an affordable price, get in touch with us and schedule your consultation with America’s leading small business accounting firm.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.