Form 940 (2016)—Employer’s Annual Federal Unemployment (FUTA) Tax Return
Purpose
Form 940 for 2016 reports the annual Federal Unemployment Tax Act liability for employers. The 2016 form maintains the $7,000 per-employee wage threshold and 0.6% net FUTA rate after applying the maximum 5.4% state credit. Credit reduction provisions apply to employers in states with outstanding federal loan balances as of November 10, 2016. Amended returns are filed using Form 940 itself by checking the amended return box.
Step-by-Step Completion Checklist
Step 1: Enter Your Business Information
Enter your nine-digit Employer Identification Number in the header box. If you applied for an EIN but have not received it, write “Applied For” and the application date. Use only your legal business entity name in the Name field, not a trade name. Verify your business address is current and complete.
Step 2: Designate Your Return Type
Check all applicable boxes at the top of the form. Check Box a if filing an amended return and attach an explanation of changes. Check Box b if you are a successor employer reporting wages of your predecessor. Check Box c if you paid no wages during 2016, then skip to Step 10 to sign and file. Check Box d if this is your final return because your business has closed or stopped paying wages, and include a statement indicating where the records will be kept.
Step 3: Identify State Unemployment Tax Jurisdictions
Enter the two-letter state abbreviation on line 1a if you paid state unemployment tax in only one state. Check the box on line 1b if you paid state unemployment tax in more than one state, which requires completing Schedule A. Check the box on line 2 if you paid wages in a credit reduction state (California or U.S. Virgin Islands for 2016), which also requires Schedule A based on outstanding federal loan balances as of November 10, 2016.
Step 4: Calculate Total Payments and Exempt Amounts
Enter total payments to all employees during 2016 on line 3, including salaries, wages, bonuses, taxable fringe benefits, retirement contributions, and tips of $20 or more per month.
On line 4, deduct payments exempt from FUTA tax, such as certain fringe benefits, group-term life insurance, retirement plan contributions, dependent care assistance up to $5,000 per employee, and other statutory exemptions. Check the applicable boxes 4a through 4e to indicate types of exempt payments.
Step 5: Determine Excess Wages and Taxable FUTA Wages
On line 5, enter the total of payments exceeding $7,000 per employee (calculated after subtracting exempt payments from each employee’s total wages). Add lines 4 and 5, then enter the result on line 6. Subtract line 6 from line 3 and enter the result on line 7 as your total taxable FUTA wages—this is the base for all subsequent calculations.
Step 6: Calculate FUTA Tax Before Adjustments
Multiply line 7 by 0.006 and enter the result on line 8. This represents your tentative FUTA tax calculated at the net rate of 0.6% after applying the maximum 5.4% credit for state unemployment taxes.
Step 7: Apply Adjustments for State Unemployment Tax Exclusions
Complete line 9 only if ALL taxable FUTA wages were excluded from state unemployment tax under state law (not just a zero percent rate). If this applies, multiply line 7 by 0.054 and enter the result on line 9. If only some wages were excluded or you paid any state unemployment tax late, skip line 9 and complete line 10 using the worksheet provided in the Form 940 instructions. Enter the worksheet results on line 10. Lines 9 and 10 are mutually exclusive—complete only one, never both.
Step 8: Calculate Credit Reduction Amount
Complete line 11 only if you paid FUTA taxable wages in a credit reduction state (California or U.S. Virgin Islands for 2016). Skip this line if you completed line 9. Use Schedule A to calculate the credit reduction for each applicable state, then enter the total credit reduction amount on line 11.
Step 9: Determine Total FUTA Tax and Balance Due
Add lines 8, 9, 10, and 11 that apply to your situation and enter the total on line 12 as your total FUTA tax liability. On line 13, enter all FUTA tax deposits made during 2016. If line 12 exceeds line 13, subtract line 13 from line 12 and enter the balance due on line 14. If line 13 exceeds line 12, subtract line 12 from line 13 and enter the overpayment on line 15, then indicate whether you want a refund or to apply it to your next return.
Step 10: Report Quarterly Tax Liability
In Part 5, report your FUTA tax liability for each quarter on lines 16a through 16d. This shows when liability was incurred, not when deposits were made. The sum of all four quarters must equal line 12. Include credit reduction amounts with your fourth quarter liability on line 16d. You may leave Part 5 blank if your total annual FUTA tax is $500 or less.
Step 11: Review Attachments and Sign the Return
Attach Schedule A if you are a multi-state employer or paid wages in a credit reduction state. Attach Schedule R if filing an aggregate return as an approved agent. Verify all calculations are accurate. Sign and date the form in Part 7. The signature must be from an authorized person such as the business owner, corporate officer, partner, member, or trustee. Include your title and telephone number.
Step 12: File Form 940 by the Deadline
File by January 31, 2017, or by February 10, 2017, if you deposited all FUTA tax when it was due. Mail your return to the appropriate IRS address based on your location and whether you are including a payment, using the address chart in the Form 940 instructions. You may also file electronically through an IRS-approved Electronic Filing System (EFS). Electronic funds must be used to make all federal tax deposits by electronic funds transfer through EFTPS at www.eftps.gov or by calling 1-800-555-4477.
Key Requirements
Deposit Schedule: Deposit FUTA tax quarterly when cumulative undeposited tax exceeds $500, due by the last day of the month following each quarter. You can pay any liabilities of $500 or less for the fourth quarter with your return.
State Tax Credit: Pay all state unemployment tax by the Form 940 due date to receive the maximum 5.4% credit against the 6.0% FUTA tax rate.
Record Retention: Maintain Form 940, supporting worksheets, Schedule A, and all documentation for at least four years after the due date or payment date, whichever is later.
Penalties: File and pay on time to avoid failure-to-file penalties of 5% per month up to 25%, failure-to-pay penalties of 0.5% per month up to 25%, and interest charges on late payments.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
