Form 940 (2010): Employer’s Federal Unemployment
Tax Return
Form 940 is used for the annual filing of federal unemployment taxes under the Federal
Unemployment Tax Act. It reports FUTA liability based on covered wages paid to employees during the tax year and reconciles quarterly FUTA tax payments already made. This return determines whether you still need to pay federal taxes, owe interest, or qualify for a refund or credit.
Before You Begin
Confirm that your business met employer responsibilities under the Federal Unemployment
Insurance program during 2010. Verify you paid wages subject to FUTA and did not fall under exclusions such as most household employees, certain agricultural labor, or Indian tribal governments unless specifically covered.
Gather all required IRS forms and supporting information, including payroll records, state unemployment insurance statements, quarterly Form 941 filings, and documentation from your state unemployment fund. If applicable, retain notices from the Department of Labor or your state agency regarding credit reduction or experience rates.
Step-by-Step Filing Instructions
Step 1: Confirm Credit Reduction State Status
Use the Form 940 instructions and IRS publications to identify whether any state where you paid wages was designated a credit reduction state in 2010. Indiana, Michigan, and South
Carolina were affected, which directly impacts your FUTA tax calculation and total unemployment tax obligations.
Step 2: Determine Covered Wages and FUTA Liability
Calculate total wages paid to employees during 2010 that are subject to FUTA, applying the
$7,000 wage base per employee. Exclude wages above this limit, certain agricultural labor wages, and qualifying domestic service wages reported through Schedule H when applicable.
Step 3: Apply the Correct FUTA Tax Rate
Apply the standard FUTA tax rate of 6.2%, then reduce it by the maximum 5.4% credit for state unemployment taxes paid on time. This results in a 0.8% FUTA tax rate for non-credit-reduction states, with higher rates required for affected states.
Step 4: Account for State Unemployment Contributions
Document all state unemployment insurance contributions paid during the year, as these determine your allowable FUTA deduction credit. Even if your state experience rate was lower or payments exceeded requirements, the federal credit remains capped at 5.4%.
Step 5: Complete Form 940 Calculations
Enter total employee payments, exclusions, and taxable FUTA wages under the appropriate column headings in Part 2. Multiply taxable wages by the applicable FUTA tax rate to calculate total tax before adjustments, ensuring figures align with payroll income records.
Step 6: Adjust for Excluded or Late State Payments
Complete Part 3 if wages were excluded from state unemployment tax or if payments were made late. Use the worksheet provided in the instructions to calculate any lost credit and additional FUTA liability resulting from noncompliance.
Step 7: Report Credit Reduction Using Schedule A
Suppose you paid wages in a state that has reduced its FUTA credit. Complete Form 940
Schedule A to calculate additional tax owed. Transfer the credit reduction amount to Form 940 to accurately reflect the total FUTA liability for the year.
Step 8: Reconcile Quarterly FUTA Tax Payments
Report all quarterly FUTA tax payments made during 2010, including payments submitted through the Federal EFTPS system. Compare total payments to your final tax calculation to determine whether you owe a balance or qualify for a refund or credit.
Step 9: Complete Quarterly Liability Reporting
Suppose your total FUTA tax exceeds $500; complete Part 5 to report actual quarterly tax liability rather than amounts paid. This reconciliation step is critical to avoid IRS processing issues, notices, or interest assessments.
- Misunderstanding FUTA Tax Rates: Employers often confuse the FUTA tax rate with
- Applying Incorrect Credit Reduction Amounts: Credit reduction percentages vary by
- Including Wages Above the $7,000 Limit: FUTA applies only to the first $7,000 of
- Reporting Payments Instead of Liability: Part 5 requires actual quarterly tax liability,
- Failing to Attach Required Schedules: Missing Schedule A or other required IRS
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 10: File and Submit the Return
File Form 940 by the deadline using e-file or mail, following IRS authorization and payment instructions. If mailing, ensure all required schedules are attached and retain a PDF file copy for your records using Adobe Acrobat or similar software.
Additional Filing Considerations
Successor Employers and Multi-State Operations
If your business acquired another employer or operated in multiple states, review special rules for successor employers. Ensure wages are not duplicated and that credit reduction adjustments are applied only to covered wages in applicable states.
Payment, Refunds, and IRS Communication
Use direct deposit for refunds when available and monitor IRS information updates for notices or follow-up actions. Keep confirmation emails, EFTPS acknowledgements, and correspondence accessible for compliance and audit purposes.
Common Filing Mistakes to Avoid the credit percentage, leading to incorrect calculations. The 0.8% rate already reflects the standard credit and should not be reduced further. state and year. Using outdated or incorrect rates can result in underpayment and IRS notices. wages per employee annually. Including excess wages inflates your reported FUTA liability. not the amounts paid. Mixing these figures causes mismatches and delays. forms results in incomplete returns and processing delays, increasing the risk of penalties or interest.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
