How Do I File Form 940 Electronically for My Business?

Businesses that pay unemployment taxes must file Form 940 annually with the IRS. This form reports and calculates the Federal Unemployment Tax Act (FUTA) tax, which funds unemployment benefits. Filing electronically streamlines the process, reduces errors, and provides faster IRS confirmation.

Employer Credentials

Before filing Form 940 electronically, businesses need credentials to access the IRS e-file system. Employers can use an authorized e-file provider or register for an IRS e-Services account, which grants access to the Modernized e-File (MeF) system.

To register for e-Services, businesses must provide their Employer Identification Number (EIN), legal business name, and contact details. The IRS verifies this information to prevent unauthorized access. Employers with existing accounts should confirm their login credentials remain active, as inactive accounts may be locked.

Businesses filing through a payroll service or tax professional must authorize them using Form 8655, Reporting Agent Authorization. Those using tax software should ensure their provider is an IRS-authorized e-file transmitter, as not all software supports direct IRS submissions.

Gathering Tax Information

Accurate reporting starts with reviewing payroll records to determine FUTA tax liability. The IRS imposes a 6.0% FUTA tax rate on the first $7,000 of each employee’s wages. Employers that pay state unemployment taxes on time may qualify for a credit of up to 5.4%, reducing the effective federal rate to 0.6%. Ensuring payroll records reflect these calculations correctly helps avoid discrepancies.

FUTA tax applies only to employees, not independent contractors. Businesses must properly classify workers using the IRS’s three-factor test, which examines behavioral control, financial control, and the nature of the relationship. Misclassification can result in penalties and back taxes, making it essential to review worker agreements and payment records before filing.

Employers should confirm that state unemployment tax payments were made on time, as late payments can reduce the FUTA credit and increase federal tax liability. Retaining proof of payments, such as bank statements or confirmations from state tax agencies, helps substantiate claims in case of an IRS inquiry.

E-Filing Process

Businesses can file Form 940 electronically using tax software that supports direct IRS submission or through an authorized e-file provider. Tax software allows businesses to file independently, while third-party providers handle the submission process. Employers should verify that their chosen method is compatible with IRS systems to prevent delays.

After selecting a filing method, businesses must enter their tax data, including total taxable wages, FUTA tax due, and any applicable credits. Most tax software solutions automatically perform these calculations and flag inconsistencies, reducing the risk of errors. Addressing discrepancies before submission minimizes the chances of an IRS rejection.

The IRS requires electronic signatures, which may involve using a Personal Identification Number (PIN) or a secure authentication process. If filing through a third-party provider, businesses may need to complete an authorization form allowing the provider to submit on their behalf. Missing signatures or improper authorization can delay processing.

Payment Arrangements

Employers must pay any outstanding FUTA tax liability by January 31 of the following year. If the accumulated liability exceeds $500 in any quarter, deposits must be made throughout the year. Quarterly payments are due by the last day of the month following the end of each quarter—April 30, July 31, October 31, and January 31. If the total tax owed for the year is less than $500, it can be paid in full when filing Form 940.

The most common payment method is the Electronic Federal Tax Payment System (EFTPS), which allows businesses to schedule payments in advance and receive confirmation receipts. Registration is required, and payments must be scheduled at least one day before the due date to ensure timely processing. Employers can also pay via credit or debit card through IRS-approved payment processors, though these services charge processing fees. Same-day wire transfers are available for urgent payments, but banks may impose additional charges.

Recordkeeping

Businesses must retain employment tax records for at least four years from the return’s due date or the date the tax was paid, whichever is later. Proper documentation is essential for audits, tax credit claims, and future filings.

Employers should keep copies of filed Form 940 returns, payment confirmations, and any IRS correspondence related to FUTA tax. Payroll records, including employee wage reports and tax deposit schedules, should also be maintained to verify the accuracy of filings. Digital storage solutions, such as cloud-based accounting software, can help organize records securely and ensure easy access. Implementing internal controls prevents unauthorized access or accidental loss of tax documents.