When paying employees in the U.S., it is essential to understand that there is more to payroll than just income tax, Social Security, and Medicare taxes. Businesses have a federal unemployment tax that is referred to as FUTA, which they need to report using IRS Form 940.
Employers can also use a paystub generator to create pay stubs that clearly show employee wages and payroll deductions. Most small businesses only learn about FUTA when they approach the January filing deadline.
This guide includes explanations about what Form 940 is, who needs to file it, how to figure out their FUTA, and when they need to pay their FUTA tax.
What Is Form 940 Used For?
A 940 Form may seem daunting; however, the calculations are easy once you understand the rules: 6.0% tax on the first $7,000 of each employee’s pay, then a reduced rate of 0.6% for most employers who pay state unemployment tax on time.
Record the wages by employee, separate from the exempt payments, deposit quarterly if you go over $500, and file your report before January 31.
Proper payroll documents simplify everything. Keeping your pay stubs and payroll reports organized for each employee gives you the wage information you need when filing, as well as a good paper trail for future inquiries.
Who Needs to File Form 940?
Tax Form 940 is required if one of the conditions mentioned applies:
- You paid your employees $1,500 or more in wages for the calendar quarter of the current tax year or in the previous tax year.
- You employed any one employee for at least one day, for more than 20 weeks.
Special rules apply to some employers:
- Different rules apply to household employers (hiring people like nannies or housekeepers). They have to remit FUTA tax only when they pay employees more than $1,000 in cash wages in any quarter of the tax year. They usually file Schedule H instead of Form 940.
- Agricultural employers must file if they pay wages of $20,000 or more or have employed at least 10 farmworkers for at least a day in 20 different weeks.
In general, nonprofit organizations, which are classified as 501(c)(3) organizations, are not subject to FUTA tax; however, they may still have to deal with the state unemployment tax.
Even if you did not have any employees for at least part of the tax year, you still have to file a tax form if you are a seasonal employer or mark your form as final in case you closed your business.
Is 940 Quarterly or Annual?
This is one of the areas where most confusion occurs. Form 940 is an annual report. You only need to file once. On the other hand, Form 941 is the quarterly report that is used to report taxes withheld from employees’ pay and taxes owed on payroll.
For FUTA, however, it can be deposited quarterly.
When Are 940 Deposits Due?
You don’t wait until January to pay all your FUTA. If your FUTA liability for a quarter is more than $500, you deposit it by the last day of the month after the quarter ends:
| Quarter | Period | Deposit due |
| Q1 | Jan 1 – Mar 31 | April 30 |
| Q2 | Apr 1 – Jun 30 | July 31 |
| Q3 | Jul 1 – Sep 30 | October 31 |
| Q4 | Oct 1 – Dec 31 | January 31 |
You do not need to deposit your liability if it is less than or equal to $500 for a particular quarter; in such cases, you carry the liability forward to the next quarter. You will only deposit once the cumulative liability exceeds $500.
Furthermore, if the accumulated liability of the whole year is $500 or less, you may pay it with your Form 940. All payments should be made electronically via the EFTPS or IRS business tax account, as paper means of payment are no longer accepted.
When Is Form 940 Due?
The due date for filing is January 31 of the subsequent year. For the tax year 2026, this date becomes January 31, 2027. If you have made payment of all FUTA taxes correctly and in a timely manner, you have an extra ten days to file; thus, the new deadline falls on February 10.
If a deadline occurs on a weekend or a public holiday, it moves to the next working day.
How FUTA Tax Is Calculated
The FUTA tax applied to the first $7,000 for each employee in a year stands at 6.0%. Anything beyond $7,000 earned by an individual is exempt from FUTA tax.
Although most employers never pay the entire 6.0% because they are effective in carrying out their responsibility of paying state unemployment taxes on time and receive a credit up to 5.4% on the FUTA tax.
A Simple Example
If you have ten workers, here’s how your total payments for the year will appear:
- Total payments made to workers: $250,000
- Payments at FUTA exempt amount: $20,000
- Earnings over $7,000 made by each employee: $160,000
- Taxable FUTA salaries are determined as follows: $250,000 − $20,000 − $160,000 = $70,000
- FUTA tax would amount to: $70,000 x 0.6% = $420
As the total of $420 is below the limit of $500, you can carry it forward rather than pay it through the quarterly deposits made by Form 940.
Payments Exempt From FUTA
Not every dollar you pay goes into FUTA. Common payments that do not apply to FUTA include the following:
Employer contributions to any type of retirement plan, such as a 401(k) plan that includes matching.
- Employer-paid health insurance costs.
- Premiums of group-term life insurance policies.
- Paid dependent care benefits.
- Workers’ compensation payments.
- Payments paid to independent contractors.
- Certain types of fringe benefits that are exempt from being considered wages.
All of these kinds of payments will be reported on line 4 of Form 940. You should maintain accurate records of your payroll, so that you are prepared to back up and substantiate any exempt amounts if asked by the IRS.
FUTA Credit Reduction States
The 5.4% credit cannot be taken for granted. When the state does not repay the loan back on time that it borrowed from the federal government in order to pay unemployment benefits, it can be classified as a reduction state. Companies are going to lose part of their credit because of this and will have to pay a higher effective FUTA rate.
In the first year such a loan exists, the credit decreases by 0.3%. This reduction continues every year while the loan stays unpaid. That is why the companies from the affected states may have to pay a significantly higher amount of money than $42 per employee.
The list of reduction states is revised every year. See the new list published by the IRS and the Department of Labor to get updated information. If your company operated in the credit reduction state and paid wages, you need to complete Schedule A before filing Form 940.
How To Fill Out Form 940, Step by Step
Form 940 consists of seven sections. Below are the details of each section.
- Part 1: Information for your return. In this section, provide your business information. Indicate your state(s) and check off any boxes as appropriate, including if you have paid unemployment tax in additional states or have paid wages in a state that uses credit reduction.
- Part 2: FUTA tax calculation. You should enter the total payments made (Line 3), exempt payments (Line 4), and wages that exceeded $7,000 per employee (Line 5) in this section. The form deducts these figures from each other to find the taxable FUTA wages and multiplies those by 0.006 to determine your tax.
- Part 3: Adjustments to your tax. You need to indicate any late state unemployment taxes as well as any wages paid in credit reduction states, though most employers complete this part without any adjustments made.
- Part 4: You need to check your FUTA taxes and any balance left or paid too much. Write the FUTA tax after all the changes you made, deduct the amount paid in deposits, and see whether you owe anything or overpaid.
- Part 5: You should only do this step if the amount of tax due is more than $500. Provide the quarterly amounts for the tax liability, not the deposits.
- Part 6: Are we allowed to speak to your third-party designee? Give the name of a person who is a tax preparer or payroll company the IRS will be able to talk to.
- Part 7: Sign on the dotted line. An authorized person needs to sign the return and date it.
How To File Form 940
You have two choices:
- Send your return electronically using a service approved by the IRS. This is generally faster than mailing a Form 940 credit reduction statement, less prone to mistakes, and will provide confirmation of receipt from the IRS.
- Mail a paper return to the right IRS mailing address for your state, which you can find in the Form 940 instructions. Use the established guidelines to determine what address applies to you based on your location and whether you are sending a payment.
Regardless of the option you pick, make sure you keep a record of your filed return and deposit confirmations for a period of four years.
Common Form 940 Mistakes To Avoid
Mixing up Form 940 and Form 941. One form is for annual payroll taxes while the other is for quarterly payroll taxes.
- Ignoring the $ 7,000 wage limitation. Applying FUTA to all of an employee’s wages is incorrect.
- Not making deposits when the amount owed exceeds $500. Penalties can add up quickly.
- Late payment on state unemployment tax. You can lose a percentage of the 5.4% credit.
- Leaving out Schedule A when there were wages in a credit-reduction state.
- Misclassifying workers. You will have FUTA liability if you classify an employee as a contractor.
Penalties for Late Filing or Payment
The IRS imposes a failure-to-file penalty of 5% of any taxes owed for each month the return is late, up to a maximum of 25%. Not making a timely payment can add a penalty of between 2% and 15%, depending on how long the delay is.
Final Thoughts
Form 940 may seem daunting; however, the calculations are easy once you understand the rules: 6.0% tax on the first $7,000 of each employee’s pay, then a reduced rate of 0.6% for most employers who pay state unemployment tax on time. Record the wages by employee, separate from the exempt payments, deposit quarterly if you go over $500, and file your report before January 31.
Proper payroll documents simplify everything. Keeping your pay stubs and payroll reports organized for each employee gives you the wage information you need when filing, as well as a good paper trail for future inquiries.
FAQs:
1) What is Form 940 used for?
Employers are supposed to use Form 940 – a form of the IRS to report the yearly Federal Unemployment Tax Act (FUTA) tax. The objective of the FUTA tax is to help fund the federal government’s unemployment system, which provides payouts to workers who get fired without their fault.
2) Is Form 940 quarterly or annual?
This tax return is filed only once a year, while the employer might have to make FUTA payments quarterly when the tax amount exceeds $500. The employer can use Form 941 for making quarterly payments for income tax withholding, Medicare, and Social Security.
3) When are 940 deposits due?
The payments must be made within a month after the quarter ends or by the following date: April 30, July 31, October 31, or January 31. When the tax amount is less than $500, it must not be deposited, but instead rolled over to the next quarter
4) What payments are exempt from FUTA?
The common types of exempt payments include contributions made by the employer to retirement plans, contributions made by the employer to health insurance, payments within IRS limits, and accident-related payments.
