Form 940

What is Form 940?

Form 940 is the annual return employers file with the IRS to report and pay tax under the Federal Unemployment Tax Act (FUTA). The tax funds unemployment compensation for workers who lose their jobs through no fault of their own.

Employers, not employees, pay FUTA tax, and nothing is withheld from paychecks. Businesses file using the Employer Identification Number assigned to their organization, the same number that appears on W-2s and other federal filings.

Who Must File Form 940?

Most employers must file if they paid $1,500 or more in wages during any calendar quarter, or had at least one employee working part of a day in 20 or more different weeks in the current or prior year. Farmworkers and household employees fall under separate thresholds.

Nonprofits with 501(c)(3) status and government entities are generally exempt. According to the IRS, businesses that meet either test still owe FUTA tax even if they pay wages through a third-party processor. Many employers fold this check into a broader FUTA compliance program that they review as headcount changes.

How Does the FUTA Tax on Form 940 Work?

The FUTA tax rate is 6.0% on the first $7,000 paid to each employee per year. Most employers qualify for a credit of up to 5.4% for timely state unemployment tax payments, which lowers the effective rate to 0.6%.

That credit connects directly to state unemployment insurance reporting, since paying state unemployment tax on time and in full is what earns the reduction. Employers in credit reduction states, where the state hasn't repaid federal loans, lose part of that credit and must complete Schedule A.

When is Form 940 Due?

Form 940 is due January 31 following the tax year. Employers who deposited all FUTA tax on time get an automatic extension to February 10, according to Forbes Advisor.

Even though the return is annual, deposits are typically required quarterly once cumulative FUTA liability exceeds $500. Employers already running a federal tax deposit process for other payroll taxes usually fold FUTA deposits into that same EFTPS routine.

How is Form 940 Different From Form 941?

Form 940 reports annual FUTA tax, an employer-only obligation. Form 941 reports the quarterly payroll tax deposits tied to income tax withholding plus shared Social Security and Medicare taxes.

Some employers assume no-payroll quarters remove the annual filing requirement entirely. That isn't always accurate, since Form 940 and Form 941 follow separate rules based on separate taxes.

What Records Support an Accurate Form 940 Filing?

Accurate filing starts with a valid federal tax ID. Confirming that identifier is current avoids mismatches between Form 940, Form 941, and W-2 records.

Keep at least four years of wage records, state unemployment tax payment confirmations, and any Schedule A calculations, as Indeed's employer guide recommends. These documents matter most if the IRS questions the credit claimed for state payments.

HR Cloud's payroll tools help HR and finance teams track FUTA thresholds, wage bases, and deposit deadlines in one place, reducing the manual work behind an accurate Form 940 filing each year.

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Frequently Asked Questions

Q: Who has to file Form 940?

A: Employers who paid $1,500 or more in wages in any calendar quarter, or had an employee working part of a day in 20 or more weeks, generally must file. Some exemptions apply for nonprofits and government entities.

Q: What is the FUTA tax rate?

A: The standard rate is 6.0% on the first $7,000 of each employee's annual wages, though most employers reduce that to an effective 0.6% through the state unemployment tax credit.

Q: When is Form 940 due?

A: Form 940 is due January 31 after the tax year ends, with an extension to February 10 for employers who made all required FUTA deposits on time.

Q: Is Form 940 the same as Form 941?

A: No. Form 940 reports annual FUTA tax paid only by the employer, while Form 941 reports quarterly income tax withholding and shared Social Security and Medicare taxes.

Q: What happens if Form 940 is filed late?

A: The IRS applies a penalty of 5% of the unpaid tax for each month the return is late, up to 25%, plus interest on any unpaid balance.