Form 940 (2020): Employer’s Federal Unemployment
Tax Return
Form 940 for 2020 reports the annual federal unemployment tax liability and claims credit for contributions to state unemployment insurance. The 2020 tax year presents unique considerations for employers navigating post-CARES Act reporting requirements and credit-reduction calculations for specific jurisdictions.
Filing Requirements for Form 940
Employers must file Form 940 if they meet either of two conditions during 2019 or 2020. You must file if you paid wages of $1,500 or more to employees in any calendar quarter during either year. If you had one or more employees for at least part of a day in 20 or more weeks in 2019 or
2020, you must file.
Understanding FUTA Tax Calculations
The FUTA tax applies to the first $7,000 you pay to each employee during the calendar year, after subtracting any payments exempt from the tax. The standard FUTA tax rate for 2020 is 6 percent on the first $7,000 of wages paid to each employee. Employers may receive a maximum credit of up to 5.4 percent for timely payment of state unemployment taxes, reducing the effective FUTA rate to 0.6 percent.
Step-by-Step Filing Process
Step 1: Verify Your Filing Obligation
Determine whether you paid wages subject to FUTA tax during 2020 by reviewing both the
$1,500 wage threshold and the 20-week employment test. Document all salaries paid to employees across all quarters to establish your filing requirements accurately.
Step 2: Identify Taxable Wages
List all wages paid to employees during 2020, including cash wages, taxable fringe benefits, and other compensation subject to FUTA. Only the first $7,000 in wages per employee counts toward the FUTA tax calculation, so maintain detailed payroll records organized by individual employees.
Step 3: Calculate Gross FUTA Tax
Multiply total FUTA wages by the 2020 FUTA tax rate of 6 percent to determine your gross tax liability before any credits. This calculation applies to all employers subject to FUTA tax, regardless of state location or variations in experience rate during the year.
Step 4: Determine State Unemployment Credit
Report the total amount of state unemployment tax you paid by the Form 940 due date for qualified state unemployment contributions. The maximum allowable credit is 5.4 percent of
FUTA wages, which directly reduces your federal FUTA tax obligation when state taxes are paid timely.
Step 5: Apply Credit Reduction Adjustments
In 2020, the U.S. Virgin Islands was the only credit-reduction jurisdiction with a 3.0 percent reduction in credit. Employers who paid wages in the USVI must complete Schedule A to calculate the additional FUTA tax owed due to this credit reduction.
Step 6: Calculate Net FUTA Tax
Subtract the state unemployment insurance credit from your gross FUTA tax to determine your net liability after applicable credits. If the credit equals or exceeds your gross tax, report zero tax liability rather than a negative amount on the return.
Step 7: Report Prior-Year Adjustments
Use Part 2 of Form 940 to report any adjustments or corrections related to 2020 wages discovered during the tax year. Include complete documentation supporting significant adjustments when filing to ensure accurate processing and minimize potential examination issues.
Step 8: Complete Required Schedules
Attach Schedule A if you operated in multiple states during 2020 or paid wages in a credit reduction state. Schedule A must detail state-by-state payroll information and state unemployment tax amounts for accurate credit calculations across different jurisdictions.
Step 9: Confirm Deposit Compliance
Review all FUTA tax deposits for 2020 to verify timely submission using the Electronic Federal
Tax Payment System or an approved payment processor. Failure to deposit penalties may apply even if your final return shows zero tax due, so retain all deposit confirmations.
- Confusing annual and quarterly deadlines: Form 940 is filed annually by February 1,
- Excluding applicable filing tests: Employers may qualify for filing under either the
- Misunderstanding credit reduction calculations: The 2020 credit reduction for USVI
- Omitting required Schedule A: Multi-state employers and those with employees in
- Full IRS transcript retrieval (Wage & Income + Account)
- Professional tax form review
- Preparation & filing support
- Tax relief options if you owe the IRS
Step 10: Sign and Submit
Enter your Employer Identification Number, business name, address, and contact information on the return before signing. An officer, manager, or authorized representative must certify the return, and paid preparers must include their Preparer Tax Identification Number when applicable.
Important Due Dates
The due date for filing Form 940 for 2020 is February 1, 2021. However, if you deposited all your FUTA tax when it was due, you may file Form 940 by February 10, 2021. Quarterly FUTA tax deposits are required when your cumulative tax liability exceeds $500 for any quarter.
Common Filing Mistakes not April 30, which is a quarterly deposit deadline. Missing the annual filing deadline can result in penalties even if quarterly deposits were timely throughout the year.
$1,500 wage test or the 20-week employment test. Failing to check both conditions can result in missed filing obligations or unnecessary filing when neither threshold is met during the year. was 3.0 percent, reducing the normal 5.4 percent credit to 2.4 percent. Incorrectly applying credit reduction rates results in underpayment of FUTA tax and potential penalties when the return is examined. credit reduction states must attach Schedule A to Form 940. If you neglect to complete and attach this required schedule, it can delay processing and potentially prompt correspondence from the IRS requesting the missing documentation.
If you’re missing tax documents or want to ensure the numbers you enter match IRS records, we can help.
