What is Form 940?

Form 940 is an IRS form that businesses use to report their unemployment tax under the Federal Unemployment Tax Act (FUTA). This is a payroll tax similar to Medicare and Social Security taxes, but it is paid entirely by employers. So, it is not required to be deducted from employees’ paychecks.

Form 940 is used to determine the total amount your business owes in federal unemployment taxes and report the amount you’ve already paid for the year. Under most circumstances, it must be filed annually by all businesses with at least one employee.

Note that while Form 940 is only filed annually, FUTA taxes must be paid quarterly if your business owes more than $500 at the end of the quarter. Most businesses choose to estimate and pay their FUTA taxes when filing Form 941—a quarterly filing to pay Medicare and Social Security taxes.

What is the Federal Unemployment Tax?

The federal unemployment tax is equal to 6.0% of the first $7,000 in wages paid to each employee during the calendar year. However, in most states employers are required to pay state-level unemployment taxes, and they can receive a discount on their FUTA taxes for doing so. The discount varies by state but can reduce the FUTA tax rate to as low as 0.6%.

Do I Need to File Form 940?

Businesses are required to file Form 940 if either of two conditions is met:

• Your business paid a total of $1,500 or more in wages to employees during the calendar year. Individuals who are the sole employee of an S-corporation count as receiving wages for Form 940.
• Your business had at least one employee for at least part of a day during 20 or more weeks over the calendar year.

If you have employees in more than one state, you must also file Form 940 Schedule A. This is used to calculate the FUTA tax rate for each state in which you have employees.

Your business does not need to file Form 940 if you only worked with independent contractors rather than employees. Businesses that work with independent contractors must file Form 1099-NEC for each contractor.

Form 940 vs. Form 941

Form 940 is used to report and pay FUTA taxes, while IRS Form 941 is used to report and pay other payroll taxes, including Medicare and Social Security taxes. Form 940 must be filed annually, while Form 941 must be filed quarterly.

Importantly, FUTA taxes must be paid quarterly for any quarter in which your business owes more than $500 in tax. Many businesses choose to submit this payment when filing Form 941, although FUTA taxes are not reported on Form 941.

When is Form 940 Due?

Form 940 is filed annually after the end of each calendar year. It is typically due on January 31. However, if your business has already paid all of the FUTA taxes that you owe for the prior year, you have an additional 10 days to file Form 940.

Quarterly FUTA tax payments are due one month after the end of each quarter:

• April 30
• July 31
• October 31
• January 31

How to File Form 940

Form 940 is a two-page form that should be relatively easy to fill out for most businesses. Instructions for Form 940 are available from the IRS.

To start, enter your business’s employer identification number (EIN), your name, your business’s trade name, and your address.

Part 1

Indicate whether your business paid state-level unemployment taxes in one or more states. If your business paid state-level unemployment taxes in multiple states, you’ll also need to fill out Form 940 Schedule A.

Part 2

Calculate the total amount you owe in FUTA taxes based on wages paid to employees. Don’t count deductions for state-level unemployment taxes yet.

Part 3

Determine your FUTA tax rate based on the state(s) in which you paid unemployment taxes. Calculate the amount you owe based on your tax rate.

Part 4

Enter the total amount your business paid in FUTA taxes for the prior year. Determine if you have a balance due or if you overpaid. 

Part 5

If you owe more than $500 in FUTA tax at the end of Part 3, enter your quarterly FUTA tax obligations for each quarter in the prior year. This information requires determining the wages you paid to employees each quarter, which can be obtained from your quarterly Form 941 filings.

Part 6

If you wish for the IRS to be able to speak with your accountant or tax preparer about this return, indicate so and provide their contact information.

Part 7

Sign and date Form 940. The form can be filed electronically or through the mail.

Conclusion

IRS Form 940 is an annual tax filing required by most businesses with at least one employee. It is used to report your federal unemployment tax payments and to determine whether you owe any additional unemployment tax for the prior year.