Form 940, the Employer's Annual Federal Unemployment Tax Return, is the form most Employers file to report FUTA tax for each calendar year.
This guide explains who must file, how FUTA deposits work, how to calculate tax, and practical steps Employers and Payroll Managers can follow.
1. Overview of Form 940: What It Is and Why It Matters
Form 940 is the Employer's annual return used to report and pay Federal Unemployment Tax Act tax, commonly called FUTA.
FUTA funds unemployment compensation programs that help workers who lose their jobs through no fault of their own.
2. Who Must File Form 940
An Employer must file Form 940 if they paid wages of $1500 or more to employees in any calendar quarter in the current or previous year.
An Employer must also file if they had one or more employees for at least part of a day in any 20 or more different weeks in the current or previous year.
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3. Exemptions From Filing Form 940
Certain Employers do not have to file Form 940, including State and Local Government Employers whose employees are exempt from FUTA.
Nonprofit Organizations exempt under Section 501(c)(3) and certain Household and Agricultural Employers may also be exempt or subject to special rules.
4. Deadlines and Extension Rules
Form 940 is due annually by January 31 for the prior calendar year.
If an Employer deposited all FUTA taxes on time during the year, the filing deadline extends to February 10.
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5. FUTA Tax Deposits: When and How Much
Employers must deposit FUTA taxes quarterly if the tax due for the quarter exceeds $500.
If the liability for a quarter is $500 or less, Employers may carry the balance forward until the cumulative amount exceeds $500.
| Quarter | Period | Deposit Deadline |
|---|---|---|
| Q1 | Jan through Mar | April 30 |
| Q2 | Apr through Jun | July 31 |
| Q3 | Jul through Sep | October 31 |
| Q4 | Oct through Dec | January 31 |
6. How To File Form 940
Employers can file Form 940 electronically or by mail, and the IRS encourages e-filing for speed and accuracy.
Approved software or authorized e-file providers can be used for electronic filing, while paper filers must use addresses listed in the form instructions based on location and payment status.
7. Calculating Your FUTA Tax Liability
The FUTA tax rate is 6.0 percent on the first $7,000 of each Employee's wages per year.
Employers who pay state unemployment taxes on time may be eligible for a credit of up to 5.4 percent, reducing the effective FUTA rate to 0.6 percent in most cases.
Example FUTA Calculation
If an Employer pays an Employee $10,000 during the year, FUTA applies only to the first $7,000.
At the 6.0 percent rate the gross FUTA would be $420 before any state credit is applied.
8. Credit Reduction States and Impact On Tax Rate
Some states that have outstanding federal unemployment loans may trigger credit reductions for Employers in those states.
When a credit reduction applies, Employers lose part or all of the usual 5.4 percent credit and may owe a higher effective FUTA rate; the IRS posts an annual list of such states.
9. Penalties For Late Filing and Payment
Failure to file Form 940 or to deposit FUTA taxes when due can result in penalties and interest.
Penalties increase with the length of delay and the amount unpaid, so timely deposits and filing are essential to avoid added costs.
10. Best Practices For Employers and Payroll Managers
Keep accurate payroll records to determine who is subject to FUTA and the amounts paid to each Employee.
Work with a Tax Professional or Payroll Manager to track quarterly liabilities and set up timely deposits if quarterly FUTA exceeds $500.
Review state unemployment tax payments and determine eligibility for the full state credit to minimize federal FUTA liability.
Consider electronic funds transfer for deposits and e-filing for the Form 940 to reduce errors and speed processing.
Additional Resources and Official Links
- IRS Form 940 Overview
- Instructions for Form 940
- IRS E-file Employment Tax Forms
- IRS Topic No. 759, Form 940 Filing and Deposit Requirements
- IRS Prior Year Forms and Instructions
Form 940: Conclusion
Filing Form 940 and managing FUTA deposits are core Employer responsibilities that support the unemployment insurance system.
Following deadlines, tracking quarterly liabilities, and using available IRS resources will help Employers and Payroll Managers stay compliant and reduce the risk of penalties.
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