Form 940 (2021)—Employer’s Annual Federal Unemployment Tax Return
Purpose
Form 940 reports the annual Federal Unemployment Tax Act (FUTA) liability for 2021. Employers calculate taxable wages using the $7,000 per-employee wage base, apply the 0.6% tax rate after applying state unemployment taxes, and report quarterly liability when the total FUTA tax after adjustments exceeds $500. The 2021 form adheres to standard FUTA rules, without stimulus reconciliation or pandemic-specific line changes.
Step-by-Step Filing Checklist
Step 1: Verify Your Employer Identification Number
Enter your Employer Identification Number (EIN) in Box 1 on every page of Form 940. If you have not yet received your EIN, enter “Applied For” along with the application date. Ensure the EIN matches exactly what the IRS assigned to your business, as filing with an incorrect EIN will result in processing delays and potential penalties.
Step 2: Report Total Payments to All Employees
Enter the total payments made to all employees during 2021 on Line 3. This amount includes all compensation, regardless of whether it is subject to FUTA tax. Reconcile all wage records before calculating this figure to ensure accuracy. Total payments may consist of salaries, wages, commissions, bonuses, fringe benefits, and other forms of compensation paid during the calendar year.
Step 3: Identify and Document Exempt Payments
Calculate and enter exempt payments on Line 4 by selecting all applicable categories. Exempt payments include fringe benefits, group-term life insurance exceeding $50,000, retirement and pension contributions, dependent care assistance, and other payments specifically excluded from FUTA tax. Document each exclusion type separately and maintain supporting records. Verify that all claimed exemptions meet IRS requirements under current FUTA regulations.
Step 4: Calculate Excess Wages Above the $7,000 Threshold
Determine the total wages paid to each employee that exceed $7,000 in cumulative salaries for 2021 and enter this amount on Line 5. FUTA tax applies only to the first $7,000 paid to each employee during the calendar year. For any employee who received more than $7,000 in total wages during 2021, subtract $7,000 from their total salaries and include only the excess amount on Line 5. Sum these excess amounts for all employees to arrive at the Line 5 total.
Step 5: Compute the Subtotal of Excluded Amounts
Add Line 4 and Line 5 together and enter the result on Line 6. This subtotal represents the combined total of exempt payments and wages exceeding the $7,000 per-employee threshold. These amounts are exempt from FUTA tax. Verify this calculation before proceeding, as Line 6 directly affects your taxable FUTA wage calculation on the next line.
Step 6: Determine Total Taxable FUTA Wages
Subtract Line 6 from Line 3 and enter the result on Line 7 to calculate your total taxable FUTA wages. This figure represents the wages subject to FUTA tax after removing both exempt payments and salaries exceeding the per-employee wage base. Cross-check this amount against payroll journals and quarterly wage reports to ensure accuracy. Line 7 serves as the foundation for calculating your preliminary FUTA tax liability.
Step 7: Calculate FUTA Tax Before Adjustments
Multiply Line 7 by 0.006 (the 0.6% tax rate after the maximum state unemployment tax credit) and enter the result on Line 8. This calculation assumes you are entitled to the maximum 5.4% credit against the standard 6.0% FUTA tax rate. You qualify for the maximum credit if you paid all required state unemployment taxes by the Form 940 due date. Line 8 represents your preliminary FUTA tax before any additional adjustments are applied.
Step 8: Apply Adjustments for Wages Excluded from State Unemployment Tax
Complete the applicable adjustment lines based on your specific circumstances. If all taxable FUTA wages you paid were excluded from state unemployment tax, multiply Line 7 by 0.054 and enter the result on Line 9. Do not complete Lines 10 or 11 if you enter an amount on Line 9.
If only some of your taxable FUTA wages were excluded from state unemployment tax or if you paid any state unemployment tax late, complete the worksheet provided in the instructions and enter the result on Line 10.
If you paid wages in a credit reduction state identified in Part 1, Line 2, complete Schedule A (Form 940) and enter the credit reduction amount on Line 11. These adjustment lines are generally mutually exclusive, meaning typically only one will apply to your situation.
Step 9: Calculate Total FUTA Tax After Adjustments
Add Lines 8, 9, 10, and 11 together and enter the sum on Line 12 to determine your total FUTA tax after adjustments. While the form requires adding all four lines, only applicable adjustment lines will contain values. Line 12 represents your final FUTA tax liability for 2021 and determines whether you must complete Part 5 for quarterly liability reporting.
Step 10: Report Total FUTA Tax Deposits Made During 2021
Enter the total amount of FUTA tax deposits you made during 2021 on Line 13. Include any overpayment from 2020 that you applied to your 2021 tax liability. Verify deposit amounts against your electronic payment records through the Electronic Federal Tax Payment System (EFTPS) or confirmation receipts from your financial institution. Accurate reporting of deposits ensures proper calculation of any balance due or overpayment.
Step 11: Determine Balance Due or Overpayment
Compare Line 12 with Line 13 to determine if you have a balance due or an overpayment. If Line 12 exceeds Line 13, calculate the balance due on Line 14. You may pay the balance due with Form 940 using Form 940-V if the amount is $500 or less. If the balance due exceeds $500, you are required to make quarterly deposits by electronic funds transfer. Failure to do so may result in penalties.
If Line 13 exceeds Line 12, report the overpayment on Line 15 and indicate whether you want the overpayment applied to your next year’s return or refunded to you.
Step 12: Complete Quarterly Liability Reporting if Required
Complete Part 5 only if Line 12 exceeds $500. If Line 12 is $500 or less, skip Part 5 and proceed to Part 6. On Lines 16a through 16d, report your FUTA tax liability (not deposits) for each quarter of 2021. Enter the liability amount for the first quarter (January through March) on Line 16a, the second quarter (April through June) on Line 16b, the third quarter (July through September) on Line 16c, and the fourth quarter (October through December) on Line 16d.
Copy the amount from Line 12 onto Line 17. The total tax liability for the year shown on Line 17 must equal Line 12. Verify that the sum of Lines 16a through 16d equals the amount shown on both Line 12 and Line 17.
Year-Specific Updates for 2021
The 2021 Form 940 does not include Employee Retention Credit reconciliation or other pandemic-period incentive adjustments, as these credits are claimed on different forms. FUTA liability is computed independently without reference to such programs. The $7,000 per-employee wage base for 2021 remains unchanged from prior years, with no inflation adjustment applied for the 2021 tax year under current FUTA regulations.
Form 940-V payment voucher instructions require that checks or money orders be made payable to “United States Treasury” and include your EIN, “Form 940,” and “2021” as identifying information on the payment. Electronic payment through EFTPS remains the required method for all federal tax deposits exceeding $500.
For 2021, the U.S. Virgin Islands is the only state that requires completion of Schedule A for credit reduction. Employers who paid wages subject to unemployment compensation laws in the U.S. Virgin Islands must complete Schedule A (Form 940) to calculate the credit reduction amount for Line 11. The credit reduction rate for the U.S. Virgin Islands in 2021 is 3.3%. Verify your state’s status in the official 2021 Form 940 instructions before determining whether Schedule A applies to your situation.
Part 5 quarterly liability reporting is mandatory only when the total FUTA tax after adjustments on Line 12 exceeds $500. No exceptions or deferrals will be applied based on pandemic conditions or other circumstances. The reporting threshold and requirements remain consistent with standard FUTA filing procedures established in prior tax years.
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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.
