Form 940 FUTA and SUTA Tax for 2023: An Overview

Updated on January 10, 2024 - 10:30 AM by Admin, TaxBandits

Under the Federal Unemployment Tax Act (FUTA), employers are subject to a payroll tax. These funds go towards unemployment compensation. There is also a payroll tax at the state level, this is called State Unemployment Tax Act (SUTA). At the end of the year employers must report these taxes on IRS Form 940. Keep reading for an overview of FUTA and SUTA taxes.

The below topics give a comprehensive understanding of the FUTA and SUTA tax on Form 940:

  1. FUTA vs SUTA: What’s the difference?
  2. How is FUTA Tax calculated?
  3. Are there any exemptions from FUTA and SUTA taxes?
  4. What is the Form 940 credit reduction state for 2023?
  5. What is the due date for FUTA taxes?

1. FUTA vs SUTA: What’s the difference?

Employers must understand both FUTA and SUTA and the difference between the two. FUTA is a federal law that was passed to generate funds needed for unemployed individuals. It stands for the Federal Unemployment Tax Act. Only employers pay FUTA taxes, not their employees.

Some states collect additional unemployment taxes from employers, this is called SUTA, or State Unemployment Taxes. The main takeaway is that FUTA taxes are deposited to the federal government and SUTA taxes are deposited at the state level.

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2. How is FUTA Tax calculated?

When calculating FUTA taxes, it's crucial to consider all the income that needs to be taxed. Generally, unemployment taxes are calculated based on the first taxable wage of $7,000 paid to employees during the year. Any amounts exceeding $7,000 are tax-exempt.

Taxable income encompasses a variety of components such as wages, bonuses, commissions, vacation allowances, sick pay, contributions to retirement plans, and more. The FUTA tax rate for Form 940 is 6%.

Sample Calculation

Let's consider a company named “Lotus INC” with 5 employees. Each of these employees earns an annual taxable income of $10,000, which brings the total wages to $25,000. In such cases, taxes are applied to the first $7,000 of the wages paid to each employee.

FUTA tax rate (2023)= 0.06

Taxable wages per employee: $7,000 (the first $7,000 is subject to FUTA taxes)

Total employees = 5

Calculation

FUTA taxes for one employee 6% of $7,000 $420
Total FUTA taxes for all employees $420 * 5 $2,100

The employer will be required to submit $2,100 in FUTA taxes to the IRS.

3. Are there any exemptions from FUTA and SUTA taxes?

Yes, certain entities and employers are exempt from both FUTA (Federal Unemployment Tax Act) and SUTA (State Unemployment Tax Act) taxes. These exemptions include:

  • Indian Tribal Government Employers: Specifically, those that have participated in the state unemployment system for the entire year.
  • Tax-Exempt Charitable Organizations: Also known as 501(c)(3) organizations.
  • State and Local Government Employers: Enjoy exemption from both FUTA and SUTA taxes.

In addition to these, individuals with H-2A, F-1, J-1, M-1, or Q-1 nonimmigrant status may be eligible for wage exemptions if they are engaged in providing certain types of exempt services.

4. What is the Form 940 credit reduction state for 2023?

A state that has not repaid money that it borrowed from the federal government to pay unemployment benefits is considered a credit reduction state.

The Form 940 credit reduction rate for 2023 is as follows:

  • California (CA) : 0.6% (up from 0.3% in 2022)
  • Connecticut (CT) : No credit reduction indicated for 2023 (remained at 0.3% in 2022)
  • Illinois (IL) : No credit reduction indicated for 2023 (remained at 0.3% in 2022)
  • New York (NY) : 0.6% (up from 0.3% in 2022)
  • U.S. Virgin Islands (VI) : 3.9% (up from 3.6% in 2022)

5. What is the due date for FUTA taxes?

According to the IRS, employers should follow this schedule for making their FUTA tax deposits:

If the undeposited FUTA tax is over $500 as of: Deposit taxes no later than:
March 31 April 30
June 30 July 31
September 30 October 31
December 31 January 31

Employers must file their Form 940, reporting FUTA taxes to the IRS by January 31, 2024 and by February 10, 2024 if the taxes are already paid. Start e-filing Form 940 with TaxBandits to avoid penalties by filing before the deadline.

Visit https://www.taxbandits.com/payroll-forms/e-file-form-940-online/ to know more 940 Form online filing.

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