Form 940 Late Filing Penalty and How to Abate It

Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, is a document businesses use to report their FUTA tax liability. This federal tax, paid solely by employers, funds unemployment benefits for workers who have lost their jobs. The Internal Revenue Service (IRS) requires businesses to file this form and pay any associated taxes by a specific deadline each year. Failing to file or pay on time can lead to financial repercussions from the IRS.

Types of Form 940 Penalties

When an employer fails to meet their Form 940 obligations, the IRS can assess several distinct penalties. A failure-to-file penalty is charged when the Form 940 itself is not submitted by the annual due date. The deadline is January 31st, but employers who have paid all of their FUTA tax deposits on time receive an automatic extension to file by February 10th. This penalty applies regardless of whether any tax is actually owed.

A separate failure-to-pay penalty applies when the FUTA tax is not paid by the deadline. This penalty is calculated on the amount of tax that remains unpaid. Even if the return is filed on time, this penalty can be assessed if the tax payment is late.

Another penalty is the failure-to-deposit. If an employer’s FUTA tax liability exceeds $500 in any quarter, they must make deposits for that quarter. The penalty for a late deposit is 2% of the unpaid amount for 1–5 days late, 5% for 6–15 days late, and 10% for more than 15 days late.

The penalty also becomes 10% if payment is not made through the required Electronic Federal Tax Payment System (EFTPS). If the tax remains unpaid more than 10 days after the first IRS notice, the penalty increases to 15%. The IRS also charges interest on any underpayment, which accrues on the unpaid tax and the penalties.

Calculating Late Filing and Payment Penalties

The failure-to-file penalty is assessed at a rate of 5% of the unpaid tax for each month or part of a month that the return is late. This penalty starts accruing the day after the filing due date and can reach a maximum of 25% of the unpaid tax. If a return is filed more than 60 days late, the minimum penalty is the smaller of $510 or 100% of the tax due. For example, if an employer owes $2,000 in FUTA tax and files three months late, the failure-to-file penalty would be $300 (5% x 3 months x $2,000).

The failure-to-pay penalty is calculated at 0.5% of the unpaid tax for each month or part of a month the tax remains unpaid. This penalty also has a maximum cap of 25% of the unpaid tax liability. Using the same $2,000 example, if the tax is paid three months late, the failure-to-pay penalty would be $30 (0.5% x 3 months x $2,000).

When both penalties are assessed for the same month, the 5% failure-to-file penalty is reduced by the 0.5% failure-to-pay penalty, making the total combined penalty 5%. Interest is also compounded daily on the outstanding tax balance, with the rate being subject to quarterly adjustments by the IRS.

Information Needed for Penalty Abatement

To have penalties removed, or abated, an employer must demonstrate “reasonable cause” for their failure to file or pay on time. Reasonable cause is established when an employer can show they exercised ordinary business care and prudence but were still unable to meet their tax obligations due to circumstances beyond their control.

Examples of situations that may qualify as reasonable cause include a fire, flood, or other natural disaster that destroyed business records. The serious illness or death of the individual responsible for filing the return, or that of their immediate family member, can also be a valid reason. Another potential cause is an inability to access necessary records, provided the reasons for this were unforeseeable and not due to the employer’s own actions.

To support a reasonable cause claim, an employer must provide specific documentation that directly corroborates the reason given for non-compliance. For instance, a serious illness requires hospital records or a doctor’s letter, while a natural disaster needs copies of police or fire reports to substantiate the claim.

How to Submit a Late Form 940 and Abatement Request

The first step is to file the overdue Form 940 and pay any tax due as quickly as possible, which stops the continued accrual of penalties and interest. The IRS will not consider a penalty abatement request until the return has been filed and the tax liability has been paid in full.

Once the return is filed and the tax is paid, the abatement request can be submitted. One method is to attach a detailed written statement to the late-filed Form 940 that explains the reasonable cause for the delay and includes copies of all supporting documents.

Alternatively, an employer can wait to receive a penalty notice from the IRS and then respond in writing with their explanation and documentation. A more formal route is to file Form 843, Claim for Refund and Request for Abatement, which provides a structured way to request the removal of penalties.