Employer's Annual Federal Unemployment (FUTA) Tax Return

Magnetic Media and Electronic Reporting

You may file Form 940 electronically or by using magnetic media. See Rev. Proc. 96-18, 1996-1 C.B. 637, for the procedures and Pub. 1314 for the tape specifications. You can find Rev. Proc. 96-18 on page 73 of Internal Revenue Bulletin 1996-04 at www. irs. gov . For information on filing Form 940 electronically, visit the IRS Web Site at www.irs.gov .

Not Liable for FUTA Tax?

If you receive Form 940 and are not liable for FUTA tax for 2001, write Not Liable across the front of the form, sign the form, and return it to the IRS.

Penalties and Interest

Avoid penalties and interest by making tax deposits when due, filing a correct return, and paying all taxes when due. There are penalties for late deposits, insufficient deposits, failure to deposit using EFTPS (when required), and late filing unless you can show reasonable cause. If you file late, attach an explanation to the return. There are also penalties for willful failure to pay tax, make returns, and for filing false or fraudulent returns.

Employer's name, address, calendar year, and employer identification number (EIN). If you are not using a preaddressed Form 940, type or print your name, trade name, address, calendar tax year, and EIN on the form. Enter your name, address, calendar tax year, and EIN here, even if you must complete Form 940-V, Form 940 Payment Voucher.

If you do not have an EIN, apply for one on Form SS-4, Application for Employer Identification Number. If you do not have an EIN by the time a return is due, write Applied For and the date you applied for the number.

Questions A through C. If you answer Yes to all the questions, you may file Form 940-EZ, a simpler version of Form 940. If you answer No to any of the questions (or you are a successor employer claiming a credit for state unemployment contributions paid by the prior employer), you must file Form 940.

Final return. If you will not have to file Form 940 (or 940-EZ) in the future, check the box on the line below question C and complete and sign the return. If you start paying FUTA wages again, file Form 940 (or 940-EZ).

Third party designee. If you want to allow an employee of your business or an individual paid preparer to discuss your 2001 Form 940 with the IRS, check the Yes box in the Third Party Designee section of the return. Also, enter the name, phone number, and any five numbers the designee chooses as his or her personal identification number (PIN). The designation must specify an individual and may not refer to your payroll office or a tax preparation firm.

By checking the Yes box, you are authorizing the IRS to call the designated employee or paid preparer to answer any questions that may arise during the processing of your return. You are also authorizing the designee to:

• Give the IRS any information that is missing from your return,
• Call the IRS for information about the processing of your return or the status of your refund or payment(s), and
• Respond to certain IRS notices that you have shared with the designee about math errors and return preparation. The notices will not be sent to the designee.

You are not authorizing the designee to receive any refund check, bind you to anything (including additional tax liability), or otherwise represent you before the IRS. If you want to expand the designee's authorization, see Pub. 947, Practice Before the IRS and Power of Attorney.

The designee authorization cannot be revoked. However, the authorization will automatically expire on the due date (without regard to extensions) for filing your 2002 Form 940 (or 940-EZ).

Part I - Computation of Taxable Wages

Line 1 - Total payments. Enter the total payments (before any deductions) you made during the calendar year for services of employees, even if the payments are not taxable for FUTA tax. Include salaries, wages, commissions, fees, bonuses, vacation allowances, and amounts paid to temporary or part-time employees; the value of goods, lodging, food, clothing, and noncash fringe benefits; contributions to a 401(k) plan, payments to an Archer MSA, payments under adoption assistance programs, and contributions to SIMPLE retirement accounts (including elective salary reduction contributions); section 125 (cafeteria) plan benefits; and sick pay (including third-party sick pay if liability is transferred to the employer).

For details on sick pay, see Pub. 15-A, Employer's Supplemental Tax Guide. Report amounts deferred under a nonqualified deferred compensation plan at the later of (a) when services are performed or (b) when there is no substantial risk of forfeiture of the rights to the deferred amount. For details, see Regulations section 31.3306(r)(2)-1. Include tips of $20 or more in a month reported to you by your employees. Also, include payments made by a previous employer if you are counting those payments for the $7,000 wage base as explained under Successor employer on page 5.

Your method of payment does not determine whether payments are wages. Thus, you may pay wages hourly, daily, weekly, monthly, or yearly. You may pay wages for piecework or as a percentage of profits. You may pay wages in cash or some other way, such as goods, lodging, food, or clothing. For items other than cash, use the fair market value when paid.

Line 2 - Exempt payments. The amounts reported on line 2 are exempt from FUTA tax. For FUTA tax purposes, wages and employment do not include every payment and every kind of service an employee may perform. In general, payments excluded from wages and payments for services excepted from employment are not subject to FUTA tax. Do not enter payments over $7,000 for each employee that you enter on line 3.

You may deduct exempt payments from total payments only if you explain them on line 2. Amounts that may be exempt from your state's unemployment tax may not be exempt from FUTA tax. For example, corporate officers' wages are not exempt from FUTA tax even though your state may exempt those wages from its unemployment tax.

Enter payments for services such as the following on line 2. These payments also must be entered on line 1.

1. Agricultural labor if you did not meet either 1 or 2 under Agricultural employers on page 2 and all payments to H-2(A) visa workers.
2. Benefit payments for sickness or injury under a workers' compensation law.
3. Household services if you did not pay total cash wages of $1,000 or more in any calendar quarter in 2000 or 2001.
4. Certain family employment. (See section 3 in Circular E.)
5. Certain fishing activities. (See Pub. 595, Tax Highlights for Commercial Fishermen.)
6. Noncash payments for farmwork or household services in a private home. (Only cash wages paid to these workers are taxable.)
7. Value of certain meals and lodging. (See section 5 in Circular E.)
8. Cost of group-term life insurance.
9. Payments attributable to the employee's contributions to a sick-pay plan.
10. Employer contributions to a SIMPLE retirement account (other than elective salary reduction contributions) and employer contributions to a 401(k) plan (if included on line 1).
11. Employer payments to an Archer MSA.
12. Benefits excludable under a section 125 (cafeteria) plan.
13. Certain statutory employees. (See section 1 in Pub. 15-A.)
14. Services performed by an inmate of a penal institution.
15. Employer reimbursements (including payments to a third-party) for qualified moving expenses, to the extent such expenses would otherwise be deductible by the employee. (See Pub. 521, Moving Expenses.)
16. Any other exempt service or pay.

For more information, see section 15 in Circular E or section 15 in Circular A, Agricultural Employer's Tax Guide (Pub. 51).

Line 3 - Payments of more than $7,000 for services. Enter the total of amounts over $7,000 you paid each employee during 2001 after subtracting any exempt payments shown on line 2. For example, you had 10 employees and paid each $9,000 during the year, including $500 of exempt payments per employee. Enter $15,000 on line 3, computed as follows:

Only the first $7,000 paid to each employee is subject to FUTA tax. Do not use the state wage base for this entry. The state wage base may be different from the Federal wage base of $7,000. Do not include exempt payments from line 2 in figuring the $7,000.

Successor employer. If you acquired a business from an employer who was required to file Form 940 (or 940-EZ), you may count the wages that employer paid to the employees who continue to work for you when you figure the $7,000 wage base. Include on line 3 the payments made by the previous employer that you included on line 1.

If the first employer paid $7,000 or more to the employee, also include on line 3 all the wages you paid to that employee. If the first employer did not pay at least $7,000 to the employee, subtract what the first employer paid from $7,000. Then subtract that result from the wages you paid to the employee, and include any result on line 3.

For example, during 2001, prior employer P paid $5,000 to employee Jones before the acquisition and acquirer A paid $3,000 to Jones after the acquisition. Subtracting the $5,000 from $7,000 yields $2,000. Subtracting the $2,000 from $3,000 (wages paid by acquirer A to Jones) yields $1,000. Acquirer A reports $8,000 (total payments) on line 1 and $6,000 ($5,000 paid by prior employer P and $1,000 in excess of the $7,000 wage base) on line 3. See section 3306(b)(1) and Regulations section 31.3306(b)(1)-1(b).

Line 5 - Total taxable wages. This is the total amount subject to FUTA tax. Use this amount in Part II to compute the gross FUTA tax and the maximum credit.

Part II - Tax Due or Refund

Line 1 - Gross FUTA tax. Multiply the total taxable wages from Part I, line 5, by .062. This is the maximum amount of FUTA tax.

Line 2 - Maximum credit. Multiply the total taxable wages from Part I, line 5, by .054. This is the maximum credit against FUTA tax for state contributions.

Line 3 - Computation of tentative credit. You must complete all applicable columns to receive any credit. Your state will provide an experience rate to you. If you have been assigned an experience rate of 0% or more, but less than 5.4%, for all or part of the year, use columns (a) through (i). If you have not been assigned any experience rate, use columns (a), (b), (c), and (i) only. If you have been assigned a rate of 5.4% or higher, use columns (a), (b), (c), (d), (e), and (i) only. If you were assigned an experience rate for only part of the year or the rate was changed during the year, complete a separate line for each rate period.

If you need additional lines, attach a separate statement with a similar format. Also, if you are a successor employer, see Special credit for successor employers, on page 3.

Column (a). Enter the two-letter abbreviation for the state(s) to which you were required to pay contributions (including the District of Columbia, Puerto Rico, and the U.S. Virgin Islands).

Column (b). Enter the state reporting number assigned to you when you registered as an employer with each state. Failure to enter the correct number may result in unnecessary correspondence.

Column (c). Enter the state taxable payroll on which you must pay state unemployment taxes for each state shown in column (a). If your experience rate is 0%, enter the wages that would have been subject to state unemployment tax if the 0% rate had not been granted.

Column (d). Enter the beginning and ending dates of the experience rate shown in column (e).

Column (e). Enter your state experience rate - the rate the state assigned to you for paying your state unemployment tax. This rate may change based on your experience with the state unemployment fund, for example, because of unemployment compensation paid to your former employees. If you do not know your experience rate, contact your state unemployment office. The state experience rate can be stated as a percent or as a decimal.

Column (f). Multiply the amount in column (c) by .054.

Column (g). Multiply the amount in column (c) by the rate in column (e).

Column (h). Subtract column (g) from column (f). If zero or less, enter -0-. This additional credit is the difference between 5.4% and your state experience rate.

Column (i). Enter the contributions actually paid to the state unemployment fund by the due date for filing Form 940. Do not include amounts you are required to pay but have not paid by the due date (January 31 or February 11 as explained under When To File on page 1). If you are filing Form 940 after the due date, include only payments made by the return due date, and see the instructions and worksheet under Line 6 - Credit below. If you are claiming excess credits as payments of state unemployment contributions, attach a copy of the letter from your state. Do not include any penalties, interest, or special administrative taxes (such as surcharges, employment and training taxes, excise tax, and assessments, which are generally listed as a separate item on the state's quarterly wage report) not included in the experience rate assigned to you.

Line 3a - Totals. Enter the totals of columns (h) and (i).

Line 3b - Total tentative credit. Add line 3a, columns (h) and (i). As noted above, column (i) includes only payments to your state unemployment fund that you made by the due date for filing Form 940. Payments made after the due date are eligible for a reduced credit and will appear on line 6 as described below.

Line 6 - Credit. This is the credit allowable for your payments to state unemployment funds. If you made no late state contributions, enter the smaller of the amount from Part II, line 2 or line 3b. If you do not have to make payments to the state, enter zero on this line.

If any state contributions were made after the Form 940 due date (January 31 or February 11 as explained under When To File on page 1), your credit for late contributions is limited to 90% of the amount that would have been allowable as a credit if such contributions were paid on or before the Form 940 due date.

Only taxpayers who made late contributions should complete the worksheet below.

Worksheet for credit computation

Example of late state contributions. You paid $1,500 of state contributions by the Form 940 due date and $1,000 after that date. Your maximum credit on Form 940, Part II, line 2 is $2,000, and your tentative credit on line 3b is $1,500. The maximum credit less the tentative credit is $500. If you had paid the $1,000 state contributions on time, you would have been allowed an additional credit of only $500, not the full $1,000. Therefore, the credit for the late contributions is limited to 90% of $500. You complete the worksheet as follows:

Enter $1,950 from line H of the worksheet on Form 940, Part II, line 6. This is the allowable credit for your contributions to the state unemployment fund.

Line 9 - Balance due. Make your check or money order payable to the United States Treasury. Write your EIN, Form 940, and 2001 on your check or money order. Enter the amount of the payment on Form 940-V at the bottom of Form 940. If the employer information is not preprinted on the payment voucher, enter the requested information. (Make certain that the entity information above line A is properly completed.)

If the amount on line 9 is under $1, you do not have to pay it. For payments over $100, see Depositing FUTA Tax on page 3.

Line 10 - Overpayment. If the amount on line 10 is under $1, we will send a refund or apply it to your next return only on written request.

Part III - Record of Quarterly Federal Unemployment Tax Liability

Complete this part only if your FUTA tax in Part II, line 7, is over $100. To figure your FUTA tax for each quarter, multiply by .008 that part of the first $7,000 of each employee's annual wages you paid during the quarter. Enter the result in the space for that quarter. Your Total for year must equal your total FUTA tax shown in Part II, line 7.

Record your FUTA tax based on when you pay wages, not on when you deposit it. For example, if you pay wages on March 29, your FUTA tax on those wages is $200, and you deposit the $200 on April 30, you would record that $200 in the first quarter, not in the second.

Example. You had two employees and paid each employee $4,000 in the first quarter, $5,000 in the second quarter, $5,000 in the third quarter, and $5,000 in the fourth quarter. (None of these payments were exempt from FUTA tax.) For the first quarter, multiply .008 x $8,000 (the amount paid to both employees), and enter $64 in the space for the first quarter. For the second quarter, multiply .008 only by $6,000 ($3,000 for each employee - the amount remaining to reach the $7,000 maximum amount subject to FUTA tax for each employee), and enter $48 in the space for the second quarter. Because you paid each employee more than $7,000 by the end of the second quarter, enter zero in the space for the third and fourth quarters. Enter $112 in the Total for year space.

We ask for the information on this form to carry out the Internal Revenue laws of the United States. We need it to figure and collect the right amount of tax. Chapter 23, Federal Unemployment Tax Act, of Subtitle C, Employment Taxes, of the Internal Revenue Code imposes a tax on employers with respect to employees. This form is used to determine the amount of the tax that you owe. Section 6011 requires you to provide the requested information if you are liable for FUTA tax under section 3301. Section 6109 requires you to provide your employer identification number (EIN).

Routine uses of this information include giving it to the Department of Justice for civil and criminal litigation, and to cities, states, and the District of Columbia for use in administering their tax laws. If you fail to provide this information in a timely manner, you may be subject to penalties and interest.

You are not required to provide the information requested on a form that is subject to the Paperwork Reduction Act unless the form displays a valid OMB control number. Books or records relating to a form or its instructions must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and return information are confidential, as required by section 6103.

The time needed to complete and file this form will vary depending on individual circumstances. The estimated average time is: Recordkeeping - 13 hr., 45 min.; Learning about the law or the form - 1 hr., 17 min.; Preparing and sending the form to the IRS - 1 hr., 49 min.

If you have comments concerning the accuracy of these time estimates or suggestions for making this form simpler, we would be happy to hear from you. You can write to the Tax Forms Committee, Western Area Distribution Center, Rancho Cordova, CA 95743-0001. Do not send the tax form to this office. Instead, see Where To File on page 2.

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