Form 940

Understanding Form 940 and your federal unemployment tax

Form 940 is your annual federal unemployment tax (FUTA) return. File it once a year to report the FUTA tax you owe on the wages you paid to employees.

FUTA, an employer-only payroll tax, applies to the first $7,000 you pay each employee per calendar year. That $7,000 is the federal wage base. Once an employee reaches that threshold, you no longer apply FUTA to their wages for the rest of the year.

The standard FUTA tax rate is 6.0%. Pay your state unemployment tax (SUTA) in full and on time, and you could qualify for a credit of up to 5.4% and lower your FUTA rate for the year.

SurePayroll By Paychex is built for small businesses – automating the payroll tax calculations, deposits, and filings that come with running payroll.

Who needs to file Form 940

You file IRS Form 940, Employer’s Annual Federal Unemployment Tax Return, if you meet either the wage test or the employee test during a calendar year.

The wage test: You paid $1,500 or more in total wages to all employees combined in any single calendar quarter.

The employee test: You had at least one employee working any part of a day in 20 or more different weeks during the year. Those 20 weeks do not need to be consecutive.

Both tests count every employee on your payroll: full-time, part-time, and temporary workers. If you run a fitness studio with one full-time instructor and two part-time front desk employees, all three count toward your 20-week threshold.

Here is how the thresholds play out.  

If you own a café and your summer payroll crosses $1,500 for a calendar quarter once you hire seasonal help, you meet the wage test that quarter and Form 940 applies for the full calendar year. If you run a small consulting business and your fourth employee stays past their 90-day trial period, you have likely reached 20 weeks, and the employee test kicks in.

A sole proprietor with no employees does not file. If you are an S corporation owner paying yourself wages, you file for yourself and any other employees on your payroll, because you are an employee of your own company.

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Is Form 940 filed annually or quarterly?

Form 940 is an annual tax return. You file it once per year by January 31 of the year following the tax year.  

You make deposits on a different timeline. If your FUTA tax liability exceeds $500 in any calendar quarter, make a deposit for that quarter. The deposit deadline is the last day of the month following the end of that quarter. Deposits are not the same as filing. You make deposits throughout the year even though you file the return annually.

Form 941 is not related to Form 940. Form 941 is the employer’s quarterly federal tax return, filed four times per year for federal income tax withholding, Social Security, and Medicare (FICA).

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Form 940 deadlines: Filing vs. deposits

File Form 940 by January 31 to report the prior calendar year’s full FUTA tax liability.

You make quarterly deposits only if your FUTA liability exceeds $500. If your total FUTA liability for the year is $500 or below, you pay the full balance when you file.

If your liability exceeds $500 in any quarter, deposit that amount by the last day of the following month:  

•       Quarter 1 (January through March): April 30

•       Quarter 2 (April through June): July 31

•       Quarter 3 (July through September): October 31

•       Quarter 4 (October through December): January 31

If your liability doesn't cross $500 in a quarter, carry it forward and add it to the next quarter's total. Once your running total exceeds $500, make your deposit. At the end of the year, deposit any remaining balance you have not covered.

Make all federal payroll tax deposits through EFTPS, the Electronic Federal Tax Payment System. Enroll once and use it for all federal tax deposits, including FUTA.

If you overpaid during the year, apply that overpayment to your next quarter’s deposit or request a refund from the IRS.

SurePayroll prepares and files Form 940 as part of year-end payroll tax processing.

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How to fill out Form 940

Work through the seven parts of your Form 940 to calculate your full FUTA liability, apply credits, and report your liability. Review the IRS instructions for Form 940 before you start if this is your first time filing.

Before you begin, gather these records:

•       Total payments to all employees for the calendar year

•       Wages paid to each individual employee over $7,000

•       A list of exempt payments (retirement plan contributions, qualifying fringe benefits, payments to contractors)

•       State unemployment tax records (what you paid and when)

•       Your quarterly FUTA deposit history for the year

Part 1: State filing status. Identify whether you operated your business in one state or multiple states during the year. If you are a multi-state employer, complete Schedule A to report your state unemployment tax contributions by state. You’ll see your business name, trade name (if different), and employer identification number on the form exactly as you see them on your EIN registration.

Part 2: FUTA tax before adjustments. Start with total wages paid to all employees. Subtract exempt payments: these include employer contributions to qualified retirement plans, fringe benefits such as group-term life insurance premiums above the IRS exclusion limit, dependent care assistance up to the annual exclusion amount, and payments to independent contractors. Then subtract wages above the $7,000 wage base per employee. Multiply what remains by 0.006. The result is your FUTA tax before any state credit adjustments. Use the IRS provided worksheet in the Form 940 instructions to help you track these calculations.

Part 3: FUTA tax adjustments. Apply the FUTA credit reduction, if eligible. If you paid your SUTA tax in full and on time, you may be able to claim the full credit reduction. If your state is a credit reduction state (one that borrowed from the federal government and hasn’t repaid it) you keep less of that credit and owe more when you file.  

Part 4: Balance due or overpayment. Compare your calculated FUTA tax liability against your quarterly tax deposits. If you deposited more than you owe, you have an overpayment. If you deposited less, you have a balance due.

Part 5: FUTA tax liability by quarter. Complete this section only if your total FUTA tax liability for the year is over $500. You break down your FUTA tax liability quarter by quarter.

Part 6: Third-party designee. If you want the IRS to communicate directly with your CPA, accountant, or bookkeeper about this return, designate them here.

Part 7: Signature. Sign and date the form to certify the information is correct.

If you have a balance due and are submitting a paper return with your payment, use Form 940-V, the payment voucher, as your payment cover sheet. If you are e-filing and paying electronically, you don’t need a voucher.

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Form 940 vs. Form 941: What’s the difference

Form 940 reports the federal unemployment tax you pay as the employer. Form 941 reports the federal withholding taxes you collect from employees and the payroll taxes you match as their employer. They cover different payroll taxes on different schedules, and filing one does not replace or offset the obligation to file the other.

You file Form 940 once per year by January 31. It reports FUTA tax, your employer-only payment to fund unemployment benefits. Your employees do not contribute to FUTA, and nothing is withheld from their wages to fund it.  

You file Form 941 four times a year, by the last day of the month following each quarter. Form 941 reports federal income tax withheld from employees’ wages, the employee and employer portions of Social Security tax, and the employee and employer portions of Medicare tax.

If the IRS determines your annual tax liability on Form 941-type taxes is $1,000 or less, you may qualify to file Form 944 instead of Form 941. Form 944 is an annual version of the withholding return. The IRS notifies you if you are eligible. Do not switch to Form 944 on your own without that confirmation.

If you have employees, you file both Form 940 and Form 941 (or Form 944). Each covers a different tax obligation and the IRS treats them separately.

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Using payroll software to file Form 940

Your FUTA obligation runs all year, but you file Form 940 once a year. Track deposits, hit deadlines, and your January 31 filing is straightforward.

A payroll service built for small business, SurePayroll automates payroll tax calculations, deposits, and year-end filings.

See how it works

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