What Is Form 940?

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Not every business is required to file Form 940 and report FUTA tax liability. Does yours?

Understanding Form 940 and Its Role in Payroll Taxes

Employers use Form 940 to report annual Federal Unemployment Tax Act (FUTA) tax.
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As directed by the act, employers must pay annual or quarterly federal unemployment taxes. Many employers pay both FUTA and a state unemployment tax (SUI).
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By contributing through FUTA, employers help support job service programs in every state for workers without employment due to circumstances beyond their control.
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FUTA taxes make up a portion of payroll taxes. Payroll taxes include federal income tax, state income tax, FICA taxes (Social Security and Medicare), FUTA, and potentially, local taxes.
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Read on if you’re ready to learn the answer to what is the 940 tax form and the difference between 940 and 941, plus how 940 payroll tax works, who files it, and how it compares to Form 941.
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What Is Form 940?

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Passed in 1939, FUTA established a payroll tax to fund unemployment benefits. Employers complete and file Form 940 to help ensure businesses contribute to the federal unemployment fund.
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While FUTA taxes—also known as the FUTA Liability Tax—benefit employees, the tax isn’t deducted from employee wages.
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 Filing Form 940 is crucial for staying compliant with federal tax laws. While it might seem like an administrative burden, it’s essential to file Form 940 on time and accurately to avoid penalties and interest charges.
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Form 940 calculations can affect how you manage payroll taxes throughout the year. Proper handling of the form can help prevent cash flow issues that might arise from unexpected tax liabilities.
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Who Needs to File Form 940?

Not every business is required to file Form 940. There are two FUTA filing requirements:
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• Your business meets the threshold of paying $1,500 in wages in any calendar quarter.

• You have one or more employees work for at least part of a day across 20 or more weeks, even if non-consecutive. Be sure to count all full-time, part-time, and temporary employees. Don’t count partners If your business is a partnership.

Small business owners must pay FUTA taxes for themselves. Sole proprietors pay FUTA taxes on behalf of their employees, but not on their own earnings.

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How to Fill Out IRS Form 940

To complete and file Form 940 download the current .pdf version from the IRS website. The .pdf offers editable fields, or you can print and complete the form by hand.

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Form 940 includes seven sections. You must complete all sections.

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General Information

Fill in your business EIN, legal name, and trade name (if you use one) and your business address.

Part 1: State Unemployment Tax Information

Indicated whether you’re a:

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Line 1a: Single state employer, or

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Line 1b: Multi-state (Line 1b) employer, or if

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Line 2: You paid wages to employees in a credit reduction state .

Part 2: FUTA Tax Before Adjustments

Calculate your FUTA tax before adjustments by entering:

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Line 3: The total amount you paid to all employees.

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Line 4: The amount of payments exempt from FUTA tax. These include fringe benefits, group-term life insurance premiums, retirement plan/pension payments, and dependent care payments.

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Line 5: The total amount of payments made to each of your employees more than $7,000.

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Line 6: Calculate the subtotal by adding Line 4 and Line 5

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Line 7: Determine the total taxable FUTA wages by subtracting Line 6 from Line 3

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Line 8: Compute your FUTA tax before adjustments by multiplying the amount on Line 7 by 0.006.

Part 3: Adjustments

Line 9: If the total taxable FUTA wages you’ve paid (Line 7) were excluded from state unemployment tax, multiply the amount in Line 7 by 0.054, and enter it as Line 9.

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Line 10: If only some of the total taxable FUTA wages you paid (Line 7) were excluded from state unemployment tax, or you made any late state unemployment tax payments, you’ll need to complete Worksheet—Line 10 from the Instructions for Form 940. Enter the amount from line 7 of the worksheet on Line 10. (No need to include the worksheet as part of your Form 940 filing).

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Line 11: If you filled out Schedule A of Form 940 for wages paid in a credit reduction state, enter the total from Schedule A on Line 11.

Part 4: FUTA Tax and Balance Due / Overpayment

Line 12: Calculate your total FUTA tax after adjustments by adding Lines 8, 9, 10 and 11. Enter this amount on Line 12.

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Line 13: Enter the amount of FUTA tax you’ve deposited for the year (including the overpayment applied from a previous year, if any) on Line 13.

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Line 14: If Line 12 is greater than Line 13, enter the difference on Line 14. This is your balance due.

• If Line 14 is more than $500, you’ll be required to use EFT to deposit your balance due. If it’s $500 or less, you can choose to pay the amount when you file your Form 940 (fill out Form 940-V at the end of the form).

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Line 15: If Line 13 is more than Line 12, enter the difference on Line 15. This is your overpayment. You can choose to apply the amount in Line 15 to your next return, or have it refunded.

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Part 5: FUTA Tax Liability by Quarter

Complete Part 5 only if the amount in Line 12 is more than $500. Be sure to enter your FUTA tax liability and not the actual amounts you’ve deposited for each quarter.

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First, enter your FUTA tax liability for each of the first three quarters as follows:

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Line 16a: First quarter (January 1 to March 31)

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Line 16b: Second quarter (April 1 to June 30)

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Line 16c: Third quarter (July 1 to September 30)

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Line 16d: Calculate your FUTA tax liability for the fourth quarter by adding the amounts from Lines 16a, 16b and 16c. Subtract this sum from the number on Line 12 to determine your FUTA tax liability for the fourth quarter.

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Line 17: Represents the sum of Lines 16a, 16b, 16c and 16d. Line 17 must always equal Line 12.

Part 6: Third-Party Designee

‍If you’d like, here’s where you can check Yes to give the IRS permission to speak to a third-party designee—say an employee or your accountant—about Form 940. You’ll need to enter your designee’s name, phone number, and five-digit personal identification number (PIN) of your choosing. Check No if you’d like to skip this option.

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Your designee is only authorized to:

• Supply the IRS with any information missing from this Form 940

• Ask the IRS for information related to the processing of this Form 940

• Respond to any IRS notices you share with them regarding errors on this Form 940

Part 7: Signature

‍Add your signature, date, name, title, and phone number to complete Form 940. If you paid a non-employee to complete Form 940 for you, they must fill out and sign the Paid Preparer section in Part 7.

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Deadlines and Filing Methods

Form 940 is an annual requirement, with the due date typically falling on January 31 of the following year. If you have deposited all your FUTA taxes on time, you have an additional ten days to file. The IRS imposes a failure-to-file penalty of 5% of the unpaid taxes for each month the return is late, capped at 25% of the total tax due.
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For FUTA tax deposits of more than $500 in any calendar quarter, you’re required to deposit the amount owing by the last day of the first month following the end of the quarter:
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• For the January to March calendar quarter, your deposit is due on April 30

• For the April to June calendar quarter, your deposit is due July 31

• For the July to September calendar quarter, your deposit is due October 31

• For the October to December calendar quarter, your deposit is due January 31

You’re encouraged to e-file Form 940 as it's faster, more secure, and provides immediate confirmation upon receipt.
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If you’d prefer, you can file and mail a paper return, just be sure to include payment with Form 940.
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Form 940 vs. Form 941: What’s the Difference?

While Form 940 and 941 have similar names, they serve different purposes.
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Form 940 is an annual form for reporting FUTA tax.
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Form 941 is a quarterly form used to report quarterly payroll taxes, including federal income tax, Social Security, and Medicare taxes withheld from employees' paychecks.
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While many businesses must file Form 940, there are exceptions. Non-profit organizations, government entities, and other specific types of employers might be exempt from filing. It's crucial to verify your business's classification to determine whether these exemptions apply. Consulting with a tax professional can provide clarity and prevent unnecessary filings.
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Filing requirements for Form 940 and Form 941 differ based on your business's payroll activities. While all businesses with employees must file Form 941 quarterly, only those meeting specific criteria must file Form 940 annually.

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How FUTA Tax Is Calculated

According to the Internal Revenue Service (IRS), FUTA, also known as the federal or FUTA wage base, “applies to the first $7,000 you pay to each employee during a calendar year after subtracting any payments exempt from FUTA tax.” The current FUTA tax rate is 6%.
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FUTA may be impacted if one or more of your employees work in a credit reduction state. As defined by the IRS, a state is a credit reduction state “if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame.”
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Since these states did not repay their outstanding loans by the deadline, employers face a credit reduction. The credit reduction varies by state. That means employers in affected states owe a higher FUTA tax rate.
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Current credit reduction states include California, New York, Connecticut, and the U.S. Virgin Islands.
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Common Mistakes to Avoid When Filing Form 940

Avoid common mistakes related to filing Form 940. Some of those mistakes include:
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• Missing the Deadline. Failing to file Form 940 on time can result in costly fail-to-file penalties. Make sure to mark your calendar for the January 31 deadline.

• Understanding the $7,000 Wage Limit. Only wages up to $7,000 are subject to FUTA tax, so it’s important to track employee earnings accurately. Failure to do so can lead to overpayment, which could increase your business expenses.

• Keeping Accurate Payroll Records. Regularly audit employee information and payroll records to help identify and correct errors before they impact tax filings.

• Understanding Penalties for Late Filing. The IRS charges a failure-to-file penalty, which can accumulate quickly if not addressed.

• Importance of Accurate State Tax Reporting. Accurate reporting of state unemployment taxes is crucial to maximize your federal tax credit and minimize your FUTA liability.

 
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How SurePayroll Helps with Form 940 and Payroll Taxes

Managing payroll taxes—including FUTA tax liability—can be time-consuming, especially if handled manually.
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The SurePayroll® By Paychex platform simplifies the process, automating tax calculations, filings, and payments. That means less time trying to stay current on payroll tax regulations and filing forms, and more time to focus on customers, employees, and business growth.
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Bottom Line

Navigating payroll taxes doesn't have to be overwhelming.
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By understanding Form 940 and its role in your payroll tax obligations, you can remain compliant and avoid costly penalties. Remember, timely and accurate filing is key to maintaining a smooth operation. Consider leveraging tools like SurePayroll to streamline your payroll processes and keep your focus on what you do best.

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