What IRS Form 940 (2021) Is For
IRS Form 940 (2021) reports the annual federal unemployment tax. It complements state unemployment taxes by contributing to the federal unemployment system that funds temporary benefits for unemployed workers. Only employers pay this tax; it does not come from employee compensation.
The form ensures compliance with federal labor laws and tax obligations, while also facilitating coordination between the federal government and state and local laws governing unemployment programs. Employers must accurately report FUTA taxable wages, payments, and available credits for wages paid during the tax year.
For a detailed breakdown of filing requirements, eligibility rules, and step-by-step instructions for IRS Form 940 (2021): Employer’s Annual FUTA Return, see our comprehensive guide.
When You’d Use Form 940 for 2021
Employers use the 2021 version of Form 940 to report or amend their federal unemployment tax for that year. This may apply when:
- Filing late after missing the original due date (January 31, 2022, or February 10, 2022, if deposits were made on time)
- Correcting an earlier submission using an amended return
- Reconciling unpaid tax or reporting adjustments from payroll or wage errors
- Updating totals due to credit reduction state adjustments
Employers that stopped paying wages during 2021 must still file for the final quarter and indicate that they no longer have employees.
Key Rules or Details for 2021
For the 2021 tax year, the FUTA tax rate was 6.0% on the first $7,000 of each employee’s wages. Most employers received a 5.4% credit for timely state unemployment tax payments, resulting in an effective rate of 0.6%. The U.S. Virgin Islands was the only state to experience a credit reduction, increasing its effective rate to 3.9%. Employers were required to include all FUTA taxable wages, such as overtime pay and bonuses, and multi-state employers were required to file Schedule A to report wages across state lines accurately.
For complete details on wage reporting, withholdings, and unemployment tax filings, see our guide to Payroll & Employment Tax Forms.
Step-by-Step (High Level)
- Gather all payroll records and wage information for the 2021 tax year, including documentation of state unemployment taxes paid. Accurate records help determine FUTA taxable wages and verify the total amount owed.
- Confirm that the employer identification number and business information are correct before completing the filing form. Errors in identification can delay IRS processing and affect compliance with federal requirements.
- Calculate the FUTA tax liability by applying the correct FUTA tax rate to wages paid. Subtract available credits for timely state unemployment tax payments to determine the net tax owed to the federal government.
- Complete IRS Form 940 (2021) using the correct version for that tax year. If an amended return is required, include explanations and supporting details to document changes to prior submissions.
- Attach Schedule A when operating as a multi-state employer or if the business is located in a credit reduction state. This ensures accurate reporting of multi-state employment and proper allocation of taxable wages.
- Review all entries for accuracy and consistency with payroll tax data, ensuring totals, due dates, and calculations match official wage and payment records.
- File the completed tax return electronically or by mail according to IRS instructions. Employers unable to pay FUTA tax in full should request a payment plan to prevent additional penalties or interest charges.
- Retain all forms, supporting schedules, and payment confirmations. Keeping detailed records helps employers remain compliant with federal and state labor laws, particularly during audits or when filing future reports.
Common Mistakes and How to Avoid Them
- Using the wrong form year: Employers must file the 2021 version of Form 940 for the 2021 tax year. Using an incorrect form year can cause processing delays or rejection.
- Failing to include Schedule A: Employers operating in multiple states must attach Schedule A (Form 940). Omitting this schedule can lead to errors in credit calculations and compliance issues.
- Misreporting credit reduction adjustments: Employers in credit reduction states who report these adjustments incorrectly may face underpayment or additional tax liability. Verify your state’s credit reduction rate each year and use IRS Form 940 instructions to ensure accurate reporting.
- Omitting FUTA-taxable wages: Employers should include all taxable wages, such as overtime pay, bonuses, and commissions. Leaving out these amounts can create discrepancies between reported and actual wages.
- Using an incorrect mailing address: Employers should confirm the correct IRS address for their state, as the address differs depending on whether a payment is enclosed. Sending the form to the wrong location can delay processing.
- Submitting an incomplete amended return: When filing an amended Form 940, employers must explain all changes and include supporting documentation. Missing explanations can result in rejection or processing delays.
- Forgetting to report partial or successor employer wages: Employers who operated for only part of the year or experienced an ownership change must report all wages accurately to avoid incomplete filings and potential audits.
If you’re facing common business tax problems, consulting a tax professional can help you avoid costly mistakes and ensure compliance.
Carefully reviewing all entries before submission helps employers remain compliant and avoid penalties or interest charges.
What Happens After You File
The IRS usually processes Form 940 within a few weeks and may send confirmation or request additional details. Penalties and interest apply to any unpaid tax, but employers can request an installment agreement using Form 9465. Individuals with reasonable cause may seek penalty abatement through Form 843 and should retain all relevant records for compliance purposes.
FAQs
What is IRS Form 940 (2021) used for?
IRS Form 940 (2021) reports the annual federal unemployment tax employers must pay under the FUTA tax system. It ensures compliance with federal and state unemployment taxes, covering wages paid to employees during the tax year.
How is the FUTA tax different from federal income tax?
FUTA tax is paid entirely by employers to fund unemployment benefits, while federal income tax is withheld from employee wages. Both are federal requirements, but the FUTA tax applies to employee compensation, not personal income taxes.
What is a credit reduction state, and how does it affect tax liability?
A credit reduction state owes outstanding federal loans, reducing the credit employers can claim against the FUTA tax. This increases the total tax liability for wages paid to employees working in that state.
When is the due date for filing Form 940?
The due date for filing Form 940 is January 31 of the following year, or February 10 if all FUTA deposits were made on time and in full. Employers who stopped paying wages must still file for their final quarter of the calendar year.
Do multi-state employers need to file additional schedules?
Yes, multi-state employers must include Schedule A (Form 940) for multi-state compliance and to accurately calculate credit reduction. This ensures proper reporting across state lines and alignment with local laws and labor requirements.
For more resources on filing or understanding prior-year IRS forms, visit our Form Summaries and Guides Library.
