940 Filing Requirements and Instructions
Navigate your annual Form 940 responsibilities. This guide clarifies how state unemployment payments directly impact your final federal tax calculation.
Form 940, the Employer’s Annual Federal Unemployment Tax Return, is the document employers use to report their liability for the Federal Unemployment Tax Act (FUTA). This tax is a federal levy imposed on employers, not deducted from employee wages. The funds generated through FUTA tax work in tandem with state unemployment systems to provide a financial cushion in the form of unemployment compensation for workers who have lost their jobs.
Determining Your Filing Requirement
An employer’s obligation to file Form 940 is established by meeting specific criteria. A business must file if it paid $1,500 or more in total wages to employees during any single calendar quarter of the current or preceding year. If a business meets this wage threshold in one quarter, the filing requirement is triggered for the entire year.
A separate test requires an employer to file Form 940 if they had at least one employee for any part of a day in 20 or more different weeks during the current or previous year. These weeks do not need to be consecutive, and the count includes full-time, part-time, and temporary employees. It is an “or” test, meaning satisfying either the wage condition or the employee duration condition creates a filing obligation.
A distinct rule exists for employers of household workers, who must file if they paid total cash wages of $1,000 or more to their household employees in any calendar quarter. For businesses that have shut down or stopped paying wages during the year, a final Form 940 must be filed. Checking the “final” box on the form notifies the IRS that no future returns are expected.
Information Needed to Complete Form 940
To complete Form 940, you must first gather the total amount of payments made to all employees during the calendar year. This figure is the gross compensation before any deductions and includes salaries, bonuses, and commissions.
Next, you must identify and sum up any payments that are exempt from FUTA tax. Common examples of exempt payments include certain fringe benefits, such as health plan contributions, group-term life insurance, and retirement plan contributions.
You will also need to calculate the total amount of payments made to each employee in excess of the first $7,000. The FUTA tax applies only to this first $7,000 of wages paid to an employee in a year, which is the FUTA wage base.
Finally, have your state unemployment tax information available. This includes the total wages subject to your state’s tax, the tax rate assigned to your business, and the total amount of state unemployment tax you paid. The dates of these payments are also needed, as timeliness impacts the credit you can claim.
Calculating the FUTA Tax and SUTA Credit
To calculate your FUTA tax, first determine your total taxable FUTA wages. This is found by taking your total annual payments to employees and subtracting both exempt payments and all wages paid to each employee over the $7,000 wage base. Once you have this taxable FUTA wage amount, you multiply it by the 6.0% FUTA tax rate to find your gross FUTA tax before credits.
A credit for contributions made to your state unemployment fund (SUTA) can reduce this tax. Employers who paid their state unemployment taxes in full and on time are generally eligible to receive a credit of up to 5.4% against their FUTA tax. This credit effectively reduces the FUTA tax rate from 6.0% to a net rate of 0.6% for most employers.
Credit reduction states are those that have borrowed federal funds to cover unemployment benefits and have not repaid the loan on time. The SUTA credit for employers in these states is reduced, leading to a higher effective FUTA tax rate. The Department of Labor identifies these states annually. For the 2024 tax year, California, New York, and the U.S. Virgin Islands were designated as credit reduction states.
Employers in these jurisdictions must reduce their 5.4% credit by a specific percentage. For 2024, the credit reduction for employers in California and New York was 0.9%, resulting in a maximum SUTA credit of 4.5% and an effective FUTA tax rate of 1.5%. The U.S. Virgin Islands had a credit reduction of 4.2%, leading to an effective FUTA tax rate of 4.8%. This adjustment is calculated on Schedule A (Form 940), which must be filed along with the main form by employers in these states.
Filing Procedures and Payment Obligations
The annual deadline for filing Form 940 is January 31 of the year following the tax year being reported. However, if you have made all your required FUTA tax deposits on time throughout the year, the filing deadline is extended to February 10. This extension rewards timely payment of the tax liability.
Employers have two primary methods for submitting the completed Form 940. The IRS recommends electronic filing through approved tax software or by a tax professional. Alternatively, you can mail a paper copy of the return to the IRS. The correct mailing address depends on your business location and whether a payment is included.
FUTA tax payments are handled separately from the annual filing and are made through the Electronic Federal Tax Payment System (EFTPS). While Form 940 is filed annually, tax deposits may be required quarterly. An employer must make a deposit for any quarter in which their FUTA tax liability exceeds $500. The payment for that quarter is due by the last day of the month following the end of the quarter. If the liability is $500 or less, it can be carried over to the next quarter.