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IRS Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return is a form filed with the Internal Revenue Service on an annual basis. It is completed by businesses with one or more employees, and it computes the employer's federal unemployment tax using the business's annual payroll.
Form 940
The Federal Unemployment Tax Act (FUTA), in conjunction with state unemployment tax agencies, provides unemployment compensation to workers who have lost their jobs. Employers typically pay both a federal and state unemployment tax.
Most employers will need to file IRS Form 940 and pay FUTA tax. The Internal Revenue Service gives three tests to determine whether you must pay FUTA tax.
General Test: You are subject to FUTA taxes on wages you paid employees who were not household or agricultural employees. This test is satisfied if you paid wages more than $1,500 in any calendar quarter or you had one or more employees for at least part of a day in 20 different weeks of the year. All full-time, part-time, and temporary employees count toward this test.
Household Employer Test: You are subject to FUTA tax if you paid a household employee more than $1,000 in any one calendar quarter in the year. Household employees include nannies, babysitters, housekeepers, landscapers, and other employees who work in a private home, club, fraternity, or sorority.
Farmworkers Test: You are subject to FUTA tax on wages paid to agricultural workers if you paid cash wages of $20,000 or more in any one calendar quarter in the year or you employed 10 or more agricultural workers for at least part of the day in 20 different weeks of the year.
Each of these three tests is independent of the others and applies only to the employers in that industry. Employers who do not meet the test requirements for their respective category above do not have to file a Form 940.
The FUTA tax rate is 6.0% in 2022. The federal wage base for the FUTA tax is $7,000, so the tax is figured on the first $7,000 paid to each employee in the year. This only applies to the FUTA tax, and your state wage base may vary.
A credit is allowed against your FUTA tax for amounts paid for state unemployment tax. The credit typically maxes out at 5.4%. For example, if you qualify for the maximum credit, you would have a FUTA tax rate of 0.6%.
A credit reduction state is one that has taken loans from the federal government for its state unemployment benefit liabilities without paying the loans back in the allowed timeframe. If your state is in a credit reduction schedule, the allowable credit is decreased by 0.3% for the first year and an additional 0.3% every year thereafter until the loan is repaid in full.
For example, in the first year of a credit reduction, an employer would only be allowed to take a 5.1% credit against its FUTA for state unemployment tax paid. This leaves the employer with an effective FUTA tax rate of 0.9% for the year. The following year, these figures would be 4.8% for the credit for state tax paid and a 1.2% effective FUTA tax rate.
The Internal Revenue Service highly encourages filing Form 940 electronically. If you want to submit the form yourself, you must have an IRS-approved software. There is a list of IRS-approved software providers, here. Otherwise, you could have a tax professional file Form 940 for you. A list of IRS-approved e-file providers is found here.
Another option for filing Form 940 is to print and mail the form. The address for filing Form 940 depends on where you live within the United States and whether or not you are including FUTA payments with your Form 940.
The Form 940 is due on January 31 for the prior tax year. There is an extension of 10 days to file, by February 10, if you have deposited all FUTA taxes when due throughout the previous year. If the due date falls on a legal holiday or weekend, the due date is pushed to the following week day.
Because FUTA payment is based on the employee wages you paid, you will need payroll documents that show your total paid wages for the year. The amount of wages subject to FUTA tax is $7,000 per employee. These FUTA wages are multiplied by the applicable rate to calculate your total FUTA liability.
If you need to produce a payslip, be sure to check out our online paystub generator. We have a wide range of paystub templates for you to choose from.
There are seven parts to the Form 940, in addition to your identifying information and the paid preparer sections at the top and bottom of the form.
The top section of the Form 940 is where you will enter your employer identification number (EIN), name, trade name, and address. Name is the legal business name, while a trade name is a DBA, if any.
The top section of the Form 940 is where you will enter your employer identification number (EIN), name, trade name, and address. Name is the legal business name, while a trade name is a DBA, if any.
Part one asks about your state unemployment tax situation. If you pay unemployment taxes in only one state, enter the state abbreviation in line 1a. If you paid in multiple states, check line 1b and complete Schedule A. If you paid wages in a credit reduction state, check line 2 and complete Schedule A.
Part 2 calculates your FUTA tax based on your payroll data. Line 3 is where you will enter total payments you made to all employees. Line 4 removes payments exempt from FUTA tax. If you have any of these payments, you will need to check the boxes that apply:
Line 5 removes payments made to each employee in excess of the $7,000 of wages subject to FUTA tax. Line 6 sums the totals of lines 4 and 5 to calculate the entire reduction amount. Line 7 removes line 6 from line 3, and it is your total taxable FUTA wages.
Line 8 multiplies your total taxable FUTA wages from line 7 by 0.6% or 0.006. This calculates your FUTA tax before adjustments, as if you received the maximum 5.4% credit from state payments.
Line 9 asks if all of your taxable FUTA wages from line 7 were excluded from state unemployment payments. If so, multiply line 7 by 5.4% or 0.054 and enter the result in line 9.
Line 10 asks if some of the taxable FUTA wages from line 7 were excluded or if you made any state unemployment payments late. If so, enter the amount from the worksheet from the Form 940 instructions.
If you are in a credit reduction state, enter the total from the Schedule A to the Form 940 in line 11.
Part 4 is where you determine how much FUTA tax you owe and calculate any overpayment or unpaid balance. The adjustments from part 3 add back to your FUTA tax before adjustments from part 2, and the result is entered on line 12.
Line 13 is where you enter your FUTA tax deposits made during the year. Line 14 calculates your balance due if line 12 is more than line 13. If the total is greater than $500, you have to deposit your tax payment. If the total is less than $500, you can submit the Form 940-V payment voucher with the tax return.
If line 13 is more than line 12, you are due a refund for an overpayment. You can either check a box to apply it to the next return or send a refund.
If your total FUTA liability from line 12 is greater than $500, you will fill out part 5. It asks for the FUTA liability for each quarter. Lines 16a, 16b, 16c, and 16d are the four quarters of the year. Line 17 sums the total tax liability for all four quarters. This number equals line 12.
If your total FUTA liability from line 12 is greater than $500, you will fill out part 5. It asks for the FUTA liability for each quarter. Lines 16a, 16b, 16c, and 16d are the four quarters of the year. Line 17 sums the total tax liability for all four quarters. This number equals line 12.
If you have an employee, paid tax preparer, or another person who is allowed to talk to the Internal Revenue Service about your Form 940, check the box for yes and enter their name and phone number. You can assign them a 5 digit PIN to use when speaking with the Internal Revenue Service. If not, check the box for no.
Your form is not complete until you appropriately sign and date it and enter a daytime phone number.
If you used a paid preparer, their information will go at the bottom of the Form 940.
Schedule A (Form 940), Multi-State Employer and Credit Reduction Information is only necessary if you checked the boxes on line 1b or 2 in part 1 of the Form 940. The form has a top section for your employer identification number and name.
The form lists every state and the District of Columbia. You should check the box next to every state in which you paid unemployment tax. You will need to know the FUTA taxable wages you paid in each state and the reduction rate, if applicable, to calculate the credit reduction for each state. The total credit reduction is entered in the last box at the bottom right of the form.
If your total annual FUTA liability is greater than $500, you will need to make at least one quarterly payment. If your quarterly liability is less than $500, carry it forward until the quarter in which your total is greater than $500
If you are subject to quarterly payments, you must deposit your FUTA payments by the last day of the month following the end of the quarter. If the deadline falls on a day that is not a business day, it is considered timely if it is paid by the close of the following business day.
If your total annual FUTA tax liability is less than $500, your FUTA payment can be sent with your Form 940 or deposited by January 31. If your FUTA tax liability is greater than $500, your quarterly payment should be deposited on the Electronic Federal Tax Payment System (EFTPS) website.
You can avoid penalties and interest charges if you deposit your taxes when they are due and file your Form 940 timely and accurately. Payroll tax penalties, or employment tax penalties, are fines for late payment or late filing of payroll taxes. They apply to FICA taxes from Form 941 and FUTA taxes from Form 940.
The penalty is based on the number of days your deposit is late. If your deposit is 1-5 calendar days late, it's 2% of your unpaid deposit, 6-15 calendar days is 5%, and more than 15 calendar days is 10% of your unpaid deposit. The penalty goes up to 15% of your unpaid deposit more than 10 days after you receive a notice or letter from the Internal Revenue Service.
IRS Forms 940 and 941 are similar only in numerical order. IRS Form 940 is an annual form filed to compute a business's federal unemployment tax. IRS Form 941, Employer's QUARTERLY Federal Tax Return, is a quarterly return filed by businesses to report federal income tax, Medicare tax, and social security tax withholding from its employees' wages. It also reports the employer's portion of social security and Medicare taxes for the quarter.
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