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What Is Form 940?

what is 940 form

Running a business is more than managing payroll. Employers are responsible for filing various tax forms that fund social programs, and Form 940 is one such form.

Federal Unemployment Tax Act, otherwise known as FUTA, is a payroll tax that employers need to pay. This is done to fund unemployment benefits for people who lost their jobs. The IRS requires all employers to report the FUTA tax they owe using Form 940.

Is it mandatory to fill out Form 940? Who must file Form 940? In this blog, we will look at Form 940, who needs to file it, and how to report FUTA tax wages.

What Is Form 940?

Form 940 or Employer’s Annual Federal Unemployment (FUTA) Tax Return is an annual tax return filed by employers to report if they are meeting FUTA requirements.

When filing form 940, there are two other important documents you must keep in mind- Schedule A and Schedule R. Schedule R is used when one Form 940 covers multiple businesses. It splits up FUTA tax, wages, credits, deposits, and payments among the businesses.

On the other hand, Schedule A, is used only if the employer is in a “credit reduction state” or owes money to FUTA. It calculates the extra FUTA tax, you, the employer must pay.

Why Do You Need To File Form 940?

Employers need to file form 940 FUTA tax reporting to help fund unemployment benefits. It is used to verify whether or not you have paid FUTA and state unemployment tax. It also makes sure you did not deduct any amount from your employees’ wages.

The IRS uses this form to cross-check and verify FUTA tax totals against EFTPS deposits to reconcile FUTA credits with state unemployment filings.

By paying state unemployment taxes on time, you can claim FUTA credit of up to 5.4%, which would reduce the FUTA rate to 0.6%.

Who Must File Form 940 & Threshold Tests?

To understand who must file Form 940, you must check if your business can pass the following tests:

  • The $1,500 Test

If your business paid $1,500 or more in wages to employees in any calendar quarter in the current year or prior year.

  • The 20-Week Test

If your business had at least one employee working 20 or more weeks during the year (include full-time, part-time, and temporary employees).

Special Cases Where You Must Pay FUTA Tax on Wages

For household employers: If you paid your household employees in cash wages of $1,000 or more in any calendar quarter.

For agricultural workers:

  • If you paid cash wages of $20,000 or more to farmworkers during any calendar quarter.
  • If you employed 10 or more farmworkers for 20 or more weeks.

Exemptions:

Not all businesses who hire employees are required to file Form 940.

  • 501(c)(3) nonprofits
  • State or local governments
  • Federally recognized Indian tribal governments

How Form 940 differs from Form 941

Form 940 is different from Form 941. While Form 940 files and reports the FUTA taxes, Form 941 is used by employers to report federal tax withheld, social security tax and Medicare tax from the employee’s paycheck.  

Form 940 is filled annually whereas Form 941 is filled on a quarterly basis.

Here is a quick table of comparison for comparing the two:  

Feature 
Form 940 
Form 941 

Official Name 

 Employer’s Annual Federal Unemployment (FUTA) Tax Return  Employer’s Quarterly Federal Tax Return 
Purpose  Reports FUTA tax (federal unemployment) for the year 

Reports federal income tax withheld, Social Security, and Medicare taxes 

Filing Frequency 

 Annually (once per year)  Quarterly (four times per year) 
Taxes Covered  FUTA tax only (funds unemployment benefits) 

Income tax withholding, employee & employer portions of Social Security and Medicare (FICA) 

Wage Base 

 FUTA applies only to first $7,000 per employee per year  Applies to all taxable wages, tips, and compensation with no annual cap for Medicare (Social Security has a yearly wage base limit) 
Tax Rate  6% on first $7,000, usually reduced to 0.6% net with state credit 

6.2% Social Security (up to wage base) + 1.45% Medicare + income tax withheld (varies by employee) 

Due Dates 

 Jan 31 (or Feb 10 if deposits were on time and in full)  Last day of month following each quarter (Apr 30, Jul 31, Oct 31, Jan 31) 
Schedules  Schedule A (credit-reduction states), Schedule R (PEOs) 

Schedule B (semiweekly depositors), Schedule D (discrepancies) 

Who Files 

 Employers meeting FUTA wage/employee thresholds 

Almost all employers with W-2 employees 

 

FUTA Wage Base, Tax Rate & Credits

The FUTA tax has a 6% tax rate that applies to the first $7,000 paid to employees each year. This limit is called the FUTA wage base. You can also get a credit of up to 5.4% if you pay your state unemployment taxes on time. This will reduce the FUTA tax rate down to just 0.6%.

For example, if you paid $7,000 to employees in a year, you’ll have to pay FUTA tax worth 6% of that amount which is $420. But if you pay state unemployment taxes, you only need to pay $42 per employee.

If your business is hiring and paying employees is in a credit-reduction state or a state with outstanding federal loans to fund unemployment, you must add a credit reduction percentage starting at 0.3% to FUTA tax rate. You can report this additional tax on Schedule A (Form 940).

The formula for calculating net FUTA tax is:

FUTA-taxable wages X 0.006 + Credit Reduction Rate = Net FUTA liability

How to Fill Form 940: Step-by-Step Process

Form 940 is divided into 7 main sections plus the payment voucher. You’ll need to fill in the form accurately to report your FUTA tax.

Part 1: State Unemployment Checkboxes

  • Enter state abbreviation in Box 1a.
  • Check Box 1b and complete Schedule A if you paid unemployment taxes for employees in multiple states.
  • Check Box 2 if you paid wages in a credit-reduction state.

Part 2: FUTA Tax Before Adjustments

Calculates FUTA tax starting from the total taxable wages you paid during the year.

  • Enter the total payments on Line 3.
  • Subtract payments that are exempt from FUTA and enter it in Line 4.

Part 3: Credit Reduction

Check if your FUTA credit should be 5.4% or is reduced due to state credit-reduction rules.

  • Enter the total after multiplying the total taxable FUTA wage from Line 7 by 0.054 in Line 9.
  • Line 10 is for the adjusted amount after excluding some wages from state unemployment tax or if you paid state taxes late.
  • Enter totals from Schedule A (Form 940) if you are subject to credit reduction in certain states in Line 11.

Part 4: FUTA Tax and Balance Due

Reports the final tax calculation and determine whether you owe money or have overpaid.

  • Add up your FUTA tax after adjustments and enter it on Line 12.
  • Report the total FUTA deposits you have already made during the year on Line 13.
  • Calculate the balance due if your total liability exceeds deposits and enter it on Line 14.
  • Line 15 is only required if Line 13 exceeds Line 12.

Part 5: Quarterly Breakdown of FUTA tax liability

Reports your FUTA tax liability for each quarter. You can skip this section if your annual FUTA liability is less than $500.

Part 6: Third-Party Designee

Mark this checkbox only if you gave permission to a third party to discuss your returns with the IRS.

Part 7: Signature

Get the signature of an authorized person who is signing on behalf of the business.

Schedules A & R

If you checked Box 1b or Box 2 in Part 1, you must attach Schedule A. This is used only if the employer is in a “credit reduction state” or owes money to FUTA

Schedule R is used by professional employer organizations (PEOs) or other agents to split up FUTA tax, wages, credits, deposits, and payments among multiple businesses.

Form 940 Deposits & Deadlines

Form 940 FUTA deposit schedule rules require you to deposit only if you exceed the minimum threshold of $500 in a quarter. If your tax liability does not exceed the minimum threshold, you need to pay the full amount when you file Form 940.

You can make the payment vis EFTPS or an authorized third-party payment by the last day of the following month in a quarter.

  • Quarter 1 (Jan to Mar): Deposit by April 30
  • Quarter 2 (Apr to Jun): Deposit by July 31
  • Quarter 3 (Jul to Sep): Deposit by October 31
  • Quarter 4 (Oct to Dec): Deposit by January 31

Form 940 Late Deposit Penalties

Late Deposit Penalties Days Late
2% 1 to 5 days late
5% 6 to 15 days late
10% 16+ days late but paid within 10 days before first notice
Up to 15% Deposit is unpaid even after 10 days of first notice

Form 940 Due Date For 2026

  • Due Date: January 31
  • Due Date (If FUTA was deposited on time and in full): February 10

If you miss filing Form 940 on time, you’ll have to pay a 5% interest per month, up to a maximum of 25%.

Your team works hard, don’t lose their credits to late FUTA filing.

File Form 940 Now

How to File Form 940 with Tax1099?

  1. Create a Tax1099 account or log in with your credentials. Select Form 940 from the tax forms.
  2. Upload your payroll data manually or use our integration feature to upload data from your CSV or accounting platform.
  3. Auto-validate your data with Tax1099. We’ll accurately calculate your FUTA tax applicable, apply credit-reduction rates, and do real-time EIN/name check with IRS records.
  4. Review your returns, schedule an EFTPS payment (if any), then e-file and send the form to the IRS.
  5. After you transmit the form to the IRS, download a stamped PDF copy, store the e-file receipt, and send a secure copy to recipients.

When to Use Form 940: Real-Life Reporting Scenarios

A startup paying three employees $9,000 each

The FUTA tax here would apply only to the first $7,000 wage base per employee and not the full $9,000. So, the total taxable FUTA wage is $21,000 ($7,000 X 3) which will be reported on Part 2, Line 7. Add in the 0.6% FUTA rate (6% FUTA rate minus the 5.4% SUTA credit) and the tax liability that needs to be paid is $126.

A multi-state retailer operates in a 0.3% credit-reduction state

If a company operates in multiple states, it must check Box 1b in Part 1 and attach Schedule A. If one state has a 0.3% credit reduction, that extra tax is added on Schedule A and carried to Part 3, Line 11 of Form 940.

Annual FUTA liability totals $480 (after considering all quarters)

The employer still has to file Form 940 and report the $480 on Line 12, Part 4 as well as check the Part 5 box to indicate that the amount did not exceed the minimum threshold.

Professional Employer Organization (PEO) files on behalf of 50 clients

In this case, report the combined FUTA wages on Part 2, Line 7 and total tax on Part 4, Line 12. And then attach Schedule R with Form 940 to allocate wages and tax to each client’s EIN.

A business was mid-year but the successor kept the staff

If a business changes ownership but employees continue working under the successor, the wages paid by the predecessor and successor are counted together toward the $7,000 FUTA wage base. The amount each employer needs to report is calculated using the Form 940 Part 2 worksheet and reported on Line 7.

FAQs

Should a payer file Form 940 if FUTA taxable wages never exceed $1,500 in any quarter?

No, you do not need to file Form 940 if you paid less than $1,500 in any quarter.

Are corporate officer wages subject to FUTA?

Corporate officers are considered employees for FUTA purposes and are subject to FUTA rules. Some states do exclude officer wages from their state unemployment rule act but that doesn’t exempt them from federal FUTA tax.

What happens if a quarterly deposit is missed?

If you miss your quarterly deposit, you’ll have to pay a penalty depending on how late the payment is:

  • 2% if 1 to 5 days late
  • 5% if 6 to 15 days late
  • 10% if 16+ days late
  • 15% if still unpaid after notice
Can a payer carry an overpayment into the next year?

Yes, you can check Line 15 “Apply to Next Return” on Form 940 to carry an overpayment into the next year.

Is the FUTA rate set to change for 2025?

There are currently no statutory changes to FUTA rate set for 2025.

Do household employers use Form 940?

Household employers generally report FUTA taxes on Schedule H, Form 1040. However, if they paid their household employees $1,000 in cash or more in any calendar quarter, they could use Form 940.

Does e-filing Form 940 satisfy the deposit requirement?

No, filing Form 940 does not satisfy the deposit requirement. You’d still need to pay your FUTA deposits via EFTPS or a third party payment service provider.

Simplify FUTA compliance

IRS approved Tax1099 allows you to eFile your 940 with security and ease, all online.

E-file Form 940