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Tax Topic #759 2006 Tax Year

Form 940 & 940–EZ – Deposit Requirements

The Forms 940 and 940EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return, have been combined. The new single form is still generally due by January 31st. If however, you timely deposit your FUTA tax liability, you may file Form 940 by February 12th.

Although Form 940 covers a calendar year, you may have to make deposits of the tax before filing the return. Deposit FUTA tax quarterly if your FUTA tax liability exceeds $500. FUTA tax is computed based on the first $7,000 of each employee's annual wages. Determine your FUTA tax liability for each quarter by multiplying that quarter's part of the first $7,000 of each employee's annual wages by the proper rate, taking into account contributions to state unemployment funds. If, however, any part of the amounts you paid to employees is exempt from state unemployment tax, you may be required to use a greater rate on those amounts. For example, in certain states, wages paid to corporate officers, certain payments of sick pay by unions, and certain fringe benefits are exempt from state unemployment tax.

If your FUTA tax for any of the first three quarters of the year (plus any undeposited amount from an earlier quarter) is over $500, deposit it by the last day of the month after the end of the quarter. If it is $500 or less, carry it to the next quarter; a deposit is not required.

For example, if your FUTA tax liability at the end of the first quarter, March 31st, is $260, you do not have to make a deposit. If your FUTA tax liability for the second quarter, which ends on June 30th, is $270, your total liability through the end of June is now $530. You must deposit $530 by July 31st.

If any deposit due date falls on a Saturday, Sunday, or legal holiday, you may deposit on the next business day.

If your FUTA tax for the fourth quarter (plus any undeposited amount from an earlier quarter) is over $500, deposit the entire amount by January 31st. If it is $500 or less, you can either make a deposit or pay it with your Form 940 by January 31st. If you paid any wages that are subject to the unemployment compensation laws of a credit reduction state, you may owe additional FUTA tax. Include the amount with your fourth quarter tax deposits. For 2004, New York was a credit reduction state. The U.S. Department of Labor will announce whether any states are credit reduction states for 2006.

If your FUTA tax liability is over $500 for any calendar quarter, you must deposit your FUTA tax liability through the Electronic Federal Tax Payment System (EFTPS) or by making payments to an authorized financial institution using Form 8109, Federal Tax Deposit Coupon. If you use Form 8109, it is very important that it shows your correct employer identification number, name, type of tax, and tax period. This information is used by the IRS to credit your account. Your check or money order should be made payable to the authorized bank where you make your deposit, not to the IRS. If you are required to use EFTPS for your Form 941 (PDF) deposits, you must use EFTPS to deposit your FUTA taxes.

If your total FUTA tax liability is more than $500, you must complete the Record of Quarterly Federal Unemployment Tax Liability on the new single redesigned Form 940, Part 5. This part of the form shows the IRS whether you deposited your tax on time. You may be charged a penalty for late deposits, for mailing your payment to the IRS instead of depositing it, or for failing to use EFTPS, when required.

For Form 940 (PDF) filing requirements, refer to Topic 760. For more information on deposit requirements and penalties, refer to Publication 15, (Circular E), Employer's Tax Guide. Refer to Publication 966 (PDF), Electronic Federal Tax Payment System, for more information on EFTPS.

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