IRS Form 940 – Employer’s Annual Federal Unemployment Tax

Meta Title: IRS Form 940 | Guide to Filing Employer FUTA Tax Return

Meta Description: Learn how to file IRS Form 940, calculate FUTA tax, and avoid penalties. Understand filing requirements, due dates, and relief options for employers.

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Nearly every business with employees must file IRS Form 940, the employer’s annual federal unemployment tax return, each year to meet its obligations under the Federal Unemployment Tax Act (FUTA). This federal unemployment tax provides a crucial safety net, funding unemployment benefits for workers who lose their jobs.

Filing this form is not optional—it is a federal requirement. Employers must calculate their FUTA tax liability, report wages paid, and pay the appropriate amount based on the first $7,000 of each employee’s wages. The FUTA tax rate begins at 6.0%, but most employers pay a much lower net tax rate after claiming state unemployment tax credits. Correctly calculating and reporting these amounts can save your business from costly penalties and interest charges.

This guide will teach you what IRS Form 940 is, who must file, and how to stay compliant. We will walk through filing deadlines, payment methods, common mistakes, and what to do if you are behind on your FUTA tax payments. Whether you are a small business owner, payroll manager, or tax preparer, this article will help you stay on track and avoid unnecessary complications with the Internal Revenue Service.

What Is IRS Form 940?

IRS Form 940 is the annual federal unemployment FUTA tax return that employers must file to report their liability under the Federal Unemployment Tax Act (FUTA). This tax is unique because it is paid entirely by the employer—it is not deducted from employees’ wages. The money collected funds federal unemployment programs, helping states pay unemployment compensation to eligible workers.

Employers use Form 940 to calculate their total FUTA tax, account for state unemployment tax credits, and determine whether they owe an additional payment or are due a refund. Filing is mandatory for most businesses that paid wages to one or more employees during the year.

FUTA Tax Rate and Wage Base

The standard FUTA tax rate is 6.0% on each employee's first $7,000 of wages. Most employers receive a credit of up to 5.4% for timely payment of state unemployment taxes, reducing the net tax rate to 0.6%. This means the maximum federal unemployment tax per employee is usually $42 annually.

If your business operates in a credit reduction state, your FUTA credit may be lower, resulting in a higher tax bill. Multi-state employers must complete Schedule A (Form 940) to allocate wages by state and apply credit reduction rates.

FUTA Tax vs. FICA Taxes

Unlike FICA taxes (Social Security and Medicare), FUTA applies only to employers and is not withheld from employee paychecks.
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Understanding these differences is essential for payroll compliance and accurate tax reporting.

Who Must File Form 940?

You must file Form 940 if your business meets at least one of these conditions:

• Wages Paid Threshold: You paid employees $1,500 or more in wages in any calendar quarter during the current or prior tax year.
  
  
• Employee Count Threshold: One or more employees worked for you for at least part of a day in 20 or more different weeks during the year. This includes full-time, part-time, and temporary employees.

These tests apply to most employers, including small businesses and local government employers. Partnerships should not count the partners themselves as employees when determining eligibility.

Special Situations

Some employers have unique filing obligations:

• Household Employees: If you paid cash wages to household employees (like nannies or caregivers), you may have different filing rules. The IRS provides detailed guidance in Publication 926.
  
  
• Agricultural Employers: You must file if you paid $20,000 or more in cash wages to farmworkers in any quarter or employed 10 or more farmworkers for 20 weeks.
  
  
• Tax-Exempt Organizations: Although some nonprofits do not pay federal income tax, many must still file Form 940 if they meet FUTA wage requirements.
  
  
• Multi-State Employers: If you operate in multiple states, you must complete Schedule A to report wages by state.
  
  
• Successor Employers: If you acquired another business and continued paying wages, you may have to file a separate return or report combined wages.

Meeting these requirements ensures compliance with the Internal Revenue Service and prevents penalties for failing to report federal unemployment tax.

When and How to File IRS Form 940

Annual Filing Deadline

The due date to file Form 940 is January 31 following the tax year. If you deposited your FUTA tax liability on time throughout the year, the IRS gives you until February 10 to file. If the deadline falls on a weekend or federal holiday, your filing is considered on time if submitted by the next business day.

Quarterly Deposit Requirements

While you file Form 940 once per year, you may need to make quarterly payments of FUTA tax if your liability exceeds $500 in a calendar quarter.

• If your undeposited FUTA tax is $500 or less for the quarter, carry it forward to the next quarter.
  
  
• You must deposit by the quarterly deadline if your accumulated liability exceeds $500.

Quarterly Deposit Schedule

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Payment Options

Employers must make FUTA deposits electronically. Options include:

• Electronic Federal Tax Payment System (EFTPS): This is the preferred method for most businesses.
  
  
• IRS Direct Pay for Businesses: This allows secure online payment directly from a bank account.
  
  
• Credit or Debit Card: This is available through approved payment processors, although convenience fees may apply.
  
  
• Financial Institutions: Some employers can work with their bank or payroll provider to make timely deposits.

Be sure to include your Employer Identification Number (EIN) and select the correct tax year when making payments. Accurate payments help avoid IRS notices and prevent over- or underpayment issues.

Step-by-Step Process to File Form 940

Step 1: Gather Payroll and Tax Records

Before you start completing IRS Form 940, collect all relevant information:

• Total payments and cash wages paid to all employees during the year
  
  
• State unemployment tax payments and rates (needed for credit calculations)
  
  
• Employer Identification Number (EIN), business name, and business address
  
  
• Quarterly payroll records showing employees’ wages, payments exempt from FUTA, and taxable wage totals
  
  
• Any prior year adjustments, including overpayments or underpayments

Having this information ready ensures accurate reporting and minimizes errors.

Step 2: Complete Each Part of IRS Form 940

Part 1: Tell Us About Your Return

• Check the box to see if this is an amended return, if you are a successor employer, or if you had no employee payments.
  
  
• Select “Final return” if you permanently stopped paying wages during the tax year.

Part 2: Determine Your FUTA Tax Before Adjustments

• Report total payments to employees (Line 3).
  
  
• Subtract FUTA exempt payments such as fringe benefits, group term life insurance, and other excluded compensation.
  
  
• Calculate total taxable FUTA wages (Line 7) and multiply by 0.006 (6%) to find total FUTA tax before credits.

Part 3: Calculate Adjustments and Credits

• Apply state unemployment tax credits to lower your net tax rate.
  
  
• If you paid wages in a credit reduction state, complete Schedule A to report additional liability.
  
  
• Multi-state employers must also use Schedule A to allocate wages correctly.

Part 4: Determine Balance Due or Overpayment

• Subtract FUTA deposits and prior credits from the total tax due.
  
  
• If there is an overpayment, indicate whether to apply it to the next year or request a refund.

Step 3: Review and Submit Your Return

• Double-check calculations and ensure you included all schedules.
  
  
• Sign and date the form—unsigned forms are considered incomplete.
  
  
• File electronically through approved IRS e-file providers or mail to the appropriate IRS address based on your state.

Completing these steps thoroughly helps you stay compliant, reduce the risk of IRS penalties, and ensure your federal unemployment FUTA tax return is accurate.

Common Mistakes and How to Avoid Them

Even a small error on IRS Form 940 can trigger IRS notices or penalties. Here are some of the most frequent issues employers face and how to prevent them:

• Misclassifying Employees: Some businesses mistakenly exclude part-time or temporary employees when counting one or more employees for filing requirements.
  Solution: Include all employees when determining if you must file, except partners or owners who are not considered employees.
  
  
• Incorrect FUTA Wage Base Calculations: Employers sometimes report wages above the $7,000 annual wage limit per employee.
  Solution: Track employees’ wages separately and cap total taxable FUTA wages at $7,000 per employee.
  
  
• Forgetting State Tax Credits: Missing the state unemployment credit calculation inflates your FUTA tax liability unnecessarily.
  Solution: Verify you pay state unemployment taxes on time and apply the full credit on Form 940.
  
  
• Missing Quarterly Payment Requirements: Waiting until year-end when your FUTA tax exceeds $500 in a calendar quarter may result in undeposited FUTA tax penalties.
  Solution: Monitor cumulative FUTA liability and make quarterly payments by the IRS deposit due dates.
  
  
• Omitting Schedule A for Multi-State or Credit Reduction States: If you are a multi-state employer or in a credit reduction state, failing to include Schedule A leads to processing delays or underpayment notices.
  Solution: Always complete Schedule A when wages are paid in more than one state or when credit reductions apply.
  
  
• Not Filing Final Return When Business Closes: Businesses that stopped paying wages sometimes skip filing.
  Solution: File a final return, check the appropriate box, and report all remaining employer contributions to close your FUTA account correctly.

By taking these steps, you minimize IRS correspondence and keep your unemployment FUTA tax return error-free.

Consequences of Ignoring IRS Form 940

Failing to file or pay your IRS Form 940 can lead to serious financial and operational consequences. The Internal Revenue Service monitors unpaid federal unemployment tax obligations and quickly applies penalties.

Late Filing Penalties

If you miss the filing due date, the IRS charges a penalty of 5% of the unpaid tax per month, up to a maximum of 25%. A minimum penalty may apply if your return is more than 60 days late, equal to the smaller of $485 or the full amount of tax owed.

Late Payment Penalties and Interest

Unpaid tax liability accrues additional penalties at 0.5% per month, increasing to 1% if the IRS sends a notice of intent to levy. Interest compounds daily until the balance is paid in full. This means waiting even a few months to pay can add substantial costs to your business.

Business and Compliance Risks

Ignoring Form 940 obligations can trigger:

• IRS Notices and Collection Actions: You may receive CP series letters demanding payment.
  
  
• Involvement of Collection Agencies: Unpaid balances can be referred for enforced collection.
  
  
• Potential Liens or Levies: The IRS can seize funds from your bank accounts or garnish receivables.
  
  
• Licensing and Contract Issues: Some states require proof of current unemployment tax compliance before renewing business licenses or approving contracts.

Addressing tax payments quickly helps protect your business and prevents escalation into enforcement actions that disrupt operations.

Relief and Resolution Options

If you owe back FUTA tax or missed the filing deadline for IRS Form 940, there are several ways to resolve your account and prevent further penalties.

Payment Plans (Installment Agreements)

The IRS offers flexible installment agreements for businesses that cannot pay their tax liability in full:

• Short-Term Payment Plans (≤120 days): This has no setup fee and is available if you can pay within four months.
  
  
• Long-Term Payment Plans: These plans require a setup fee (ranging from $31 to $225) and allow monthly payments. Automatic debit is recommended to avoid missed payments.

Penalty Relief Options

You may be able to reduce or remove penalties:

• First-Time Abatement: This is available if you have a clean compliance history.
  
  
• Reasonable Cause Relief: This is granted for situations beyond a taxpayer’s control, such as serious illness, natural disasters, or unavoidable absence.

Currently Not Collectible Status

If paying would cause severe financial hardship, you can request “Currently Not Collectible” status. This temporarily halts IRS collection efforts, though interest will continue to accrue.

Offer in Compromise (OIC)

In rare cases, you may settle your federal unemployment tax debt for less than the full amount owed. The IRS will evaluate your ability to pay, income, and assets before approving an OIC.

Professional Help and Resources 

Staying compliant with IRS Form 940 requirements can be challenging, especially if you manage payroll across multiple states or have received IRS notices. Working with a qualified tax preparer, CPA, or payroll professional can save time and reduce costly mistakes.

When to Seek Professional Help

You should consider professional assistance if:

• You operate in a credit reduction state or are a multi-state employer and must complete Schedule A.
  
  
• You received IRS notices about missing deposits or underpaid FUTA tax.
  
  
• You must correct a previous year’s FUTA tax return or file an amended one.
  
  
• Your business recently stopped paying wages, or you closed your doors and must file a final return.

Recommended Service: Employer Compliance Packets

Our Employer Compliance Packets (941/940 Payroll Transcripts) help businesses confirm payroll tax deposits, check for unfiled returns, and resolve discrepancies with the Internal Revenue Service. With these transcripts, you can verify your FUTA history, match employer contributions to IRS records, and confidently prepare for audits or payment plans.

Need to Confirm Your FUTA Tax History?

Get a packet of your IRS payroll tax transcripts to verify filings and catch compliance issues early.

Additional Resources

You can also use IRS tools like Get Transcript to access your tax account, or enroll in EFTPS to make secure electronic deposits. If you need professional representation, a CPA, Enrolled Agent, or tax attorney can communicate with the IRS on your behalf and negotiate relief programs.

Frequently Asked Questions (FAQs)

How Do State Unemployment Taxes Affect Form 940?

State unemployment taxes play a significant role in lowering your FUTA liability. The federal government allows up to a 5.4% credit for employers who pay state unemployment taxes on time. This credit directly reduces what you owe on Form 940. By staying current with state payments, you help ensure programs that pay unemployment benefits remain funded while minimizing your FUTA tax balance.

Do I have to file Form 940 if I paid wages only for part of the year?

Yes, even if you paid wages in just one quarter, you must still file the tax form for that year. Report all employer payments made during the year and check the “final return” box if you permanently stopped paying wages. This ensures your account remains accurate with the IRS and prevents unnecessary notices from the federal government.

What Is a Credit Reduction and Why Does It Matter?

A credit reduction occurs when a state has an outstanding loan from the federal government for its unemployment program. Employers in credit reduction states must pay FUTA tax at a higher rate. This additional employer payment is reported on Schedule A of Form 940 and helps ensure enough funds to continue paying unemployment benefits in affected states.

When Should Employers Seek Professional Help for Form 940?

Employers should seek assistance if they missed deposits, received IRS notices, or need help reconciling state unemployment taxes with FUTA credits. A professional can review your tax form, confirm all employer payments, and help you set up payment plans. This can prevent interest charges and allow the federal government to apply your payments correctly to keep your account current.