Form 940 is a tax form used by employers in the United States to report and pay Federal Unemployment Tax Act (FUTA) taxes. FUTA taxes help fund unemployment benefits for workers who lose their jobs. Unlike other payroll taxes, FUTA tax is paid solely by the employer and is not deducted from employees' wages.

Employers must file Form 940 annually with the IRS to report their FUTA tax liability. The form ensures compliance with federal regulations and helps support state unemployment insurance programs. This guide will cover what Form 940 is, who needs to file it, key components, how to complete it, deadlines, common mistakes, and its benefits. Whether you’re a business owner, HR manager, or payroll specialist, understanding Form 940 is essential for proper tax compliance.

Table of Contents

1. What is Form 940?
2. Who Needs to File Form 940?
3. Key Components of Form 940
4. How to Complete Form 940
5. Form 940 Filing Deadlines and Payment Methods
6. Common Mistakes and How to Avoid Them
7. Exemptions and Special Cases for Form 940
8. Advantages of Filing Form 940 Correctly
9. FAQs About Form 940

What is Form 940?

Form 940 is an IRS tax document that employers use to report and pay Federal Unemployment Tax (FUTA). FUTA is a payroll tax that funds unemployment benefits at the state and federal levels.

Unlike Social Security and Medicare taxes, FUTA is not deducted from employees’ paychecks. Instead, employers are responsible for paying the tax based on wages paid to employees.

Key points about Form 940:

• It is filed annually by January 31st of the following year.
• The standard FUTA tax rate is 6.0% on the first $7,000 of an employee’s wages.
• Employers who pay state unemployment taxes on time may qualify for a tax credit of up to 5.4%, reducing their FUTA rate to 0.6%.

Who Needs to File Form 940?

Employers must file Form 940 if they meet one of the following criteria:

1. Paid at least $1,500 in wages to employees during any calendar quarter in the year.
2. Had at least one employee for 20 or more different weeks during the year (part-time, full-time, or temporary employees count).

Who Is Exempt from Filing?

Certain employers do not need to file Form 940, including:

• Nonprofit organizations (501(c)(3)) – Exempt from FUTA tax.
• Household employers – They report FUTA taxes using Schedule H (Form 1040) instead.
• Farm employers – They file Form 943 instead of Form 940.

Key Components of Form 940

1. Employer Information

• Business name, address, and EIN (Employer Identification Number).

2. Wages Subject to FUTA Tax

• The total amount of taxable wages paid to employees during the year.

3. Adjustments for State Unemployment Tax Credits

• Employers who pay state unemployment taxes on time may qualify for a FUTA tax reduction.

4. FUTA Tax Calculation

• FUTA tax applies only to the first $7,000 of each employee’s wages.
• The 6.0% standard tax rate can be reduced to 0.6% if eligible for a 5.4% credit.

5. Total FUTA Tax Due

• The final amount owed after credits and adjustments.

6. Payments and Balances Due

• Employers who owe more than $500 in FUTA tax must make quarterly payments.

How to Complete Form 940

Step 1: Enter Employer Information

• Provide your business name, address, and EIN.

Step 2: Calculate FUTA Wages

• Report the total wages paid to employees.
• Subtract any exempt payments (such as fringe benefits or retirement plan contributions).

Step 3: Apply the FUTA Tax Rate

• Multiply taxable wages by 6.0% to calculate the initial FUTA tax amount.
• If eligible, apply the state unemployment tax credit.

Step 4: Determine the Total FUTA Tax Due

• If the total is $500 or more, you must make quarterly payments throughout the year.
• If it is less than $500, you can pay in a lump sum when filing the form.

Step 5: Submit Form 940 to the IRS

• File electronically using the IRS e-file system or by mailing a paper copy.

Form 940 Filing Deadlines and Payment Methods

Filing Deadline

• January 31st of the following year (e.g., for 2023 wages, file by January 31, 2024).
• If all FUTA tax payments were made on time, the deadline extended to February 10th.

Payment Methods

Employers can pay their FUTA tax using:

• Electronic Federal Tax Payment System (EFTPS)
• IRS Direct Pay
• Check or money order (if filing a paper form)

Common Mistakes and How to Avoid Them

1. Miscalculating the FUTA Tax Rate

Solution: Ensure you apply state tax credits correctly to avoid overpaying or underpaying.

2. Missing the Filing Deadline

Solution: Mark the January 31st deadline on your calendar and set reminders for quarterly payments.

3. Incorrectly Reporting Employee Wages

Solution: Use payroll software or consult a tax professional to ensure wage accuracy.

4. Forgetting to Include State Tax Contributions

Solution: If you paid state unemployment tax, apply for the 5.4% credit to reduce your tax burden.

Exemptions and Special Cases for Form 940

• Household employers report FUTA taxes on Schedule H (Form 1040).
• Agricultural businesses must file Form 943 instead of Form 940.
• Nonprofit organizations (501(c)(3)) are exempt from FUTA tax.

Advantages of Filing Form 940 Correctly

• Avoids IRS penalties for late or incorrect filings.
• Reduces FUTA tax liability by properly applying state tax credits.
• Ensures compliance with federal employment tax laws.
• Simplifies payroll processing by keeping unemployment tax obligations up to date.

FAQs About Form 940

1. Can I file Form 940 electronically?

Yes, the IRS allows electronic filing via the IRS e-file system.

2. What happens if I miss the Form 940 deadline?

Late filers may face penalties and interest on unpaid taxes.

3. Is FUTA tax deducted from employee wages?

No, FUTA tax is paid entirely by the employer.

4. Can a business be exempt from filing Form 940?

Yes, nonprofits, agricultural businesses, and household employers may be exempt.

A correctly filed Form 940 ensures compliance with federal tax laws and helps businesses avoid penalties. Download our free Form 940 guide today for a hassle-free filing process! 🚀

Sample For Form 940