Introduction to Federal Unemployment Tax Act Tax (FUTA) and Form 940

This is the fifth post in the Employment Tax Law series. This series is dedicated to presenting individuals, sole proprietorships, and small to large businesses with a basic understanding of employment taxes, including the risks and responsibilities associated with those taxes.

The FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs. FUTA tax is collected from only the employer.

The current FUTA tax rate for calendar year 2010 is 6.2%. This rate applies to the first $7,000 the employer pays to each employee during a calendar year after subtracting any payments exempt from FUTA tax. Another way of saying this is that the FUTA tax “wage base” is $7,000.

Employers receive a credit against FUTA tax for timely paying state unemployment taxes. The maximum credit is 5.4%. Thus, most employers pay a FUTA tax of .8% on the first $7,000 paid to each employee during a calendar year.

Employers should file Form 940, Employer’s Annual Federal Unemployment Tax Return, annually. The Form 940 is due on February 1. If the employer deposited FUTA tax when it was due, the employer may file on February 10.

Tax deposits are not required if the employer owes less than $500 of FUTA tax annually. If the employer owes more than $500 of FUTA tax per quarter, a deposit is required each quarter on the last day of the month after the end of the quarter.

If the employer owes less than $500 in any quarter, the employer carries the FUTA tax balance from that quarter to the following quarter and does not need to deposit. When the balance owing is $500 or more, the employer must deposit on the last day of the month after the end of the quarter.

For example, if the balance owing for FUTA taxes is more than $500 at the end of the first quarter, ending March 31, the employer must deposit FUTA taxes by April 30. If the balance owing at the end of the first quarter is $300, then a FUTA tax deposit is not required. If the employer owes $300 for the first quarter and $300 for the second quarter, the employer must deposit $600 before July 31.

Employers can deposit FUTA tax electronically through the Electronic Federal Tax Payment System (EFTPS) or an authorized financial institution, such as a bank.