What Form 940 Is For
IRS Form 940 (2023) reports an employer’s FUTA tax liability under the Federal Unemployment Tax Act, which funds federal and state unemployment programs for workers who lose their jobs. Employers pay FUTA tax on the first $7,000 of each employee’s annual wages and must file if they meet wage or employment thresholds for the taxable year. The form also helps reconcile federal requirements with state unemployment insurance programs, ensuring compliance for multi-state employers, remote employees, and businesses subject to varying state and local labor laws.
For a detailed breakdown of filing requirements, eligibility rules, and step-by-step instructions for IRS Form 940 (2023): Employer’s Annual FUTA Return, see our comprehensive guide.
When You’d Use Form 940
Employers use Form 940 each year to report FUTA taxes owed on employee wages. The due date for the 2023 form was January 31, 2024, or February 12, 2024, if all FUTA deposits were made on time.
You would also use this form for the following purposes:
- You file a late return if you missed the original deadline and need to report unpaid FUTA taxes for the tax year.
- You file an amended return if you must correct previously reported wages, tax rates, or credits.
- You claim adjustments if your business operated in a state with a credit reduction that increased your FUTA liability.
- You reconcile any prior overpayments or request a refund from the IRS if excess payments were made.
Employers who receive IRS notices, such as CP-161 (for unfiled returns) or CP-215 (for balances due), should respond promptly to prevent further penalties and interest. Filing as soon as possible helps reduce charges and maintains compliance with IRS and Department of Labor requirements.
Key Rules or Details for 2023
For the 2023 tax year, the FUTA tax rate stayed at 6.0 percent on the first $7,000 of each employee’s wages. Employers generally received a 5.4 percent credit for timely state unemployment tax payments, resulting in a net FUTA rate of 0.6 percent. Credit reduction states included California and New York, at 0.6 percent, and the U.S. Virgin Islands, at 3.9 percent. Employers in these jurisdictions paid an additional FUTA tax and were required to comply with all applicable labor and tax laws governing wage reporting, employee compensation, and deductions.
Step-by-Step (High Level)
- Gather all payroll and wage records for each employee to ensure accuracy for the entire taxable year.
- Review prior tax returns and any amended filings to confirm that all information is consistent across forms.
- Determine the total FUTA wages for each employee by applying the $7,000 annual wage base limit.
- Apply the standard 6.0 percent FUTA tax rate and subtract up to 5.4 percent in state unemployment tax credits.
- Calculate and include any credit reduction adjustments if your business operates in a credit reduction state.
- Complete Form 940 carefully and attach Schedule A if your business paid wages in more than one state.
- Electronically file the completed form through the IRS e-file system or mail a paper version to the correct address.
- Submit payment using the Electronic Federal Tax Payment System (EFTPS) or another IRS-approved payment option.
- Keep all copies of filed forms, schedules, and payment confirmations for a minimum of four years for verification and compliance purposes.
- Confirm that all multi-state employment and remote employee wages comply with the applicable unemployment insurance and labor laws in each jurisdiction.
For complete details on wage reporting, withholdings, and unemployment tax filings, see our guide to Payroll & Employment Tax Forms.
Common Mistakes and How to Avoid Them
- Including wages exceeding the FUTA limit: Employers should report only the first $7,000 of each employee’s wages to prevent overstating tax liability.
- Applying credit reduction rates incorrectly: Employers should verify the IRS’s annual list of credit reduction states to apply the correct rate.
- Omitting Schedule A for multi-state operations: Employers must attach Schedule A when paying wages in more than one state to ensure accurate reporting.
- Using an incorrect Employer Identification Number: Employers should confirm that their EIN and business name match IRS records before submitting the form.
- Misclassifying workers as independent contractors: Employers should follow IRS classification guidelines to ensure all employees are properly reported for FUTA tax.
- Paying state unemployment taxes late: Employers should make all state unemployment tax payments by January 31 to preserve full FUTA credit eligibility.
- Failing to file an amended return when needed: Employers should promptly submit an amended Form 940 to correct any prior errors or omissions. For more guidance on common business tax problems, consult a tax professional.
Regular payroll audits, HR compliance reviews, and well-documented leave and pay policies in employee handbooks can help prevent these errors and minimize penalties or interest.
What Happens After You File
The IRS typically processes employment tax returns within six to eight weeks; however, late or amended filings may take longer to process. Employers receive confirmation or adjustment notices showing any additional tax, penalties, or interest owed. If the full balance cannot be paid, they can request an installment agreement using Form 9465 or apply online for a payment plan. Monitoring IRS account updates and maintaining proof of all filings helps ensure continued compliance with federal and state labor laws.
FAQs
What is IRS Form 940 (2023) used for?
IRS Form 940 (2023) is used by employers to report and pay the federal unemployment tax under the Federal Unemployment Tax Act. It ensures compliance with labor laws, unemployment insurance programs, and federal requirements for employee wages.
Who must file Form 940 under the Federal Unemployment Tax Act?
Employers must file if they paid wages of $1,500 or more during the tax year or had at least one employee for 20 or more weeks of the year. Filing ensures businesses meet federal and state unemployment insurance obligations.
How does Form 940 relate to state and local laws?
Form 940 interacts with state and local laws because employers may claim credits for state unemployment taxes that have been paid. Multi-state employers must comply with all applicable jurisdictions, ensuring accurate reporting and HR compliance.
Can I electronically file an amended Form 940 return?
Yes, employers can electronically file amended returns for IRS Form 940 to correct prior filings, report additional tax, or claim adjustments. The process simplifies compliance and helps reduce errors across state lines.
What are the credit reduction states for the 2023 tax year?
For 2023, the credit reduction applied to employers in California, New York, and the U.S. Virgin Islands. These jurisdictions were required to make additional FUTA tax payments because their state unemployment loans remained unpaid.
For more resources on filing or understanding prior-year IRS forms, visit our Form Summaries and Guides Library.
