How to File Form 940 for FUTA Taxes

Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, is a mandatory IRS document that employers use to report their FUTA tax liability. This form functions as an annual reconciliation of the FUTA tax owed for the calendar year. FUTA taxes, along with state unemployment tax systems, contribute to a federal fund that provides unemployment compensation to eligible workers who have lost their jobs. Unlike some other payroll taxes, FUTA tax is paid solely by the employer and is not withheld from employee wages.

Understanding Your Filing Obligation

Most employers are required to file Form 940. This obligation is determined by two tests: the “wage test” and the “employment test.” Under the wage test, an employer must file Form 940 if they paid wages of $1,500 or more to employees in any calendar quarter during the current or previous year.

The employment test requires filing if an employer had at least one employee for some part of a day in 20 or more different weeks during the current or previous year. These weeks do not have to be consecutive, and the test includes full-time, part-time, and temporary employees. If either of these conditions is met, the employer has a FUTA tax filing obligation.

Certain types of employment or entities may be exempt from FUTA tax. For instance, payments to certain family members, such as a child under 21 or a parent of the employer, may be exempt. Non-cash payments to farmworkers or household employees can also be exempt. Additionally, certain tax-exempt organizations, like those with 501(c)(3) status, and governmental entities are exempt from FUTA taxes.

Information Required to Complete Form 940

Before completing Form 940, employers must gather specific financial and payroll information. This ensures accuracy and streamlines the filing process. Employers should have records of the total wages paid to all employees during the calendar year, including compensation, commissions, bonuses, and reported tips.

It is also necessary to identify and quantify any payments exempt from FUTA tax. These exemptions can include certain fringe benefits, contributions to qualified retirement plans, or specific dependent care payments. Employers will also need their total state unemployment tax (SUTA) contributions paid, along with their state unemployment tax agency account numbers and experience rates. Information regarding any state unemployment tax credits received or any credit reduction amounts, which occur if a state has outstanding federal unemployment loans, will also be necessary. This data is found in payroll records, W-2 forms, and state unemployment tax statements.

Step-by-Step Form Completion

Filling out Form 940 involves a structured process, moving through several parts to calculate the final FUTA tax liability.

Part 1 requires basic information about the return. Employers indicate if they paid state unemployment tax in a single state or in multiple states. This part also identifies if wages were paid in a state subject to credit reduction, which necessitates completing Schedule A (Form 940).

Part 2 focuses on determining the total FUTA tax before adjustments. Employers enter the total payments made to all employees during the year. From this, payments exempt from FUTA tax are subtracted. The amount of wages paid to each employee exceeding the $7,000 FUTA wage base is also accounted for, as only the first $7,000 of wages per employee is subject to FUTA tax. The resulting total taxable FUTA wages are then multiplied by the FUTA tax rate, 0.006 (0.6%), to determine the initial FUTA tax.

Part 3 addresses adjustments to the FUTA tax. This includes adjustments if taxable FUTA wages were excluded from state unemployment tax, or if state unemployment taxes were paid late. This part also accounts for credit reduction amounts from Schedule A (Form 940).

Part 4 calculates the total FUTA tax and determines any balance due or overpayment. This section sums the FUTA tax after adjustments and compares it to the FUTA tax deposited for the year. The difference indicates either a balance due or an overpayment.

Part 5 is completed if the total FUTA tax is greater than $500. This section reports the FUTA tax liability by quarter, not the amounts deposited. The sum of these quarterly liabilities must equal the total FUTA tax. The form concludes with Part 6, where employers can designate a third party to discuss the return with the IRS, and Part 7, the signature section.

Filing and Payment Procedures

Once Form 940 is completed, employers must proceed with filing and payment. The preferred method for filing Form 940 is electronically (e-file), offering faster processing and immediate confirmation. Employers can use IRS-authorized e-file providers. Paper filing by mail remains an option, with specific mailing addresses provided in the Form 940 instructions.

FUTA tax payments are made through electronic funds transfer (EFT). The Electronic Federal Tax Payment System (EFTPS) is the mandatory method for most federal tax deposits. Employers should enroll in EFTPS to ensure timely and compliant payments.

The annual filing deadline for Form 940 is January 31st of the year following the calendar year being reported. If all FUTA tax has been deposited on time, employers may have an extended deadline, until February 10th. While Form 940 is an annual return, FUTA tax payments may be required quarterly. Employers must deposit FUTA tax if their cumulative liability exceeds $500 in a quarter. If the liability is $500 or less, it carries over to the next quarter until the cumulative amount exceeds $500, at which point a deposit is due by the last day of the month following the end of that quarter. If the total FUTA tax for the year is $500 or less, payment can be made with the Form 940. Employers should retain copies of the filed form and payment records.