More from our experts
If you’re operating a small business with more than one employee who works more than 20 weeks per year, you’re most likely required to pay payroll taxes as part of the Federal Unemployment Tax Act (also commonly known as FUTA).
And you’ll also need to prepare and file IRS Form 940, the Employer’s Annual Federal Unemployment Tax Return, each year.
Seem complicated? We’ve got your back with a quick explanation of how 940s work, a PDF download below, plus some guidance and instructions for completing yours.
What is Form 940?
Form 940 is an annual tax form that documents your company’s contributions to federal unemployment taxes. It’s based on the Federal Unemployment Tax Act (FUTA), a federal law that requires employers to pay taxes that cover unemployment payments for workers who lose their jobs.
Most employers are required to pay taxes under FUTA, so if you’ve paid an employee for more than 20 weeks during the year and their wages are more than $1,500 in a quarter, you will need to pay the tax and file your 940 return.
For agricultural employers, the rules are a bit different. You’ll also need to pay federal unemployment taxes if you:
- Paid cash wages of $20,000 or more to farmworkers during any calendar quarter, OR
- Employed 10 paid more farmworkers during some part of the day (whether or not at the same time) during any 20 or more different weeks
For most businesses, the effective tax rate is 0.06% (minus a 5.4% credit) of the first $7,000 in wages paid to an employee in a calendar year. Unlike most other payroll taxes, FUTA taxes are the sole responsibility of the employer and are not deducted from the employee’s paycheck.
Though a 940 is filed annually, employers are responsible for depositing taxes owed on a quarterly basis, with all deposits made using electronic funds transfer (EFT). If your business is new and you haven’t filed your first 940 yet, the IRS will automatically enroll you when you apply for your EIN. Don’t forget, most employers are also required to pay state unemployment tax (SUTA).
When should Form 940 be filed?
The deadline to file your 940 form is January 31 each calendar year. If your business has closed, or you stopped paying wages, you are still required to file a final 940, notifying the IRS about the change in status.
If you use modern payroll software or a payroll service provider, your 940 will likely be completed for you automatically. Remember, as the business owner, it’s still your responsibility to ensure that any deposits are made on or before the due date and that your return is accurate.
Credit Reduction States
An item to note for 2022 (and important to keep in mind when completing Form 940) is that the states of California, Connecticut, Illinois, and New York currently all have overdue unemployment insurance loans. While Uncle Sam keeps an eye out for these overdue payments — and because the loans are past due — each has been assessed a FUTA credit reduction for 2022 and has lost part of the 5.4% tax credit.
What does this mean for employers in these states?
Employers in California, Connecticut, Illinois, and New York will have higher payroll costs for 2022 as the new FUTA tax credit rate is reduced by 0.3%, lowering it from 5.4% to 5.1%. This means that the effective FUTA tax rate is 0.9% (up 0.3% from the standard rate of 0.6%).
If you’re a business owner in one of the states mentioned above and unsure how to address your obligations as a result of the credit reduction (or how to account for it on Form 940), it’s a good idea to reach out to your accountant or tax professional to understand the implications for your company.
What do you need to fill out Form 940?
To complete Form 940, you’ll need the following:
- Form 940 – Downloadable PDF
- To know whether you’re required to pay state unemployment tax
- Experience rates (which help set your unemployment tax rate) for any state that you’re required to pay taxes in
- If your state is subject to a credit reduction based on money borrowed from the federal government
- Total amount of payments made to all employees throughout the year including compensation, fringe benefits, retirement and pensions, tips, or other payments
- Payment exemptions such as insurance plan contributions, group-term life insurance, dependent care, and other non-cash payments
- Total wages (if any) paid in excess of $7,000
Instructions for completing Form 940
There are currently seven parts that need to be completed for a 940. Here are the line by line instructions:
Form 940, Part 1
- In this section, indicate whether you had to pay state unemployment insurance in one (or more) states.
Line 1a. If your business has to pay state unemployment tax, enter the state abbreviation on line 1a
Line 1b. If your business has to pay state unemployment tax in more than one state, you will need to check the box on line 1b and complete Schedule A.
Line 2. If you paid wages in a state that is subject to credit reduction, which means it owes money to the federal government, check the box on line 2. For employers in states* subject to a credit reduction, you may owe additional federal unemployment tax. To figure out the amount, complete Schedule A of Form 940.
*In 2022, these states include California, Connecticut, Illinois, and New York.
Form 940, Part 2
- Prior to any adjustments, you will figure our your FUTA tax in this section.
Line 3. Enter the total amount of payments made to all employees on this line
Line 4. Enter any payments exempt from FUTA tax, checking the corresponding boxes for exemptions such as fringe benefits, group-term life insurance, retirement and pension, and dependent care
Line 5. Enter the total amount of payments made to employees in excess of $7,000 (sometimes to referred to as excess wages)
Line 6. Enter the total of line 4 and line 5
Line 7. Enter the total taxable FUTA wages by subtracting line 3 from line 6
Line 8. Enter the total FUTA tax before adjustments on this line
Form 940, Part 3
- This section accounts for any adjustments that need to be made in the case that you are not receiving the full 5.4% FUTA tax credit.
Line 9. If ALL of the taxable FUTA wages you paid were excluded from state unemployment tax, multiply line 7 by 0.054 (line 7 × 0.054 = line 9) and go to line 12
Line 10. If SOME of the taxable FUTA wages you paid were excluded from state unemployment tax, OR you paid ANY state unemployment tax late (after the due date for filing Form 940), complete the worksheet in the instructions. Enter the amount from line 7 of the worksheet
Line 11. If a credit reduction applies, enter the total from Schedule A
Form 940, Part 4
- This section is used to calculate your FUTA tax balance that is due or overpayment (if applicable).
Line 12. Enter Total FUTA Tax after adjustments by adding lines 8, 9, 10, and 11
Line 13. Enter the amount of FUTA tax that has been deposited during the year, including any overpayment applied from a prior year
Line 14. Enter any balance due. If line 12 is more than line 13, enter the excess on line 14
- If line 14 is more than $500, you must deposit your tax
- If line 14 is $500 or less, you may pay with this return
Line 15. Here is where you enter any overpayment, with the option to have the overpayment applied to the next return or request a refund
Form 940, Part 5
- Use this section to report your FUTA tax liability by quarter ONLY if the amount entered in line 12 exceeds $500.
Line 16. Lines 16a, b, c, and d are where you will report your FUTA tax liability for each quarter
Line 17. This is the total liability for all four quarters
Form 940, Part 6
- Choose a third-party designee
Here you can designate (and give permission) to an employee, paid tax preparer, or another person to speak with the IRS regarding the FUTA return by simply checking the “Yes” box and adding the person’s name and contact information. The choice is yours and if you prefer not to, check off the “No” box.
If you check “Yes” in this section, make sure to include a 5-digit personal identification number that the designee can use to identify themselves as the third-party authorized to discuss Form 940 with the IRS. The pin number can be any combination of five digits you choose.
Form 940, Part 7
Sign and date the form.
And that’s it!
While your Form 940 is filed annually, please don’t forget about those quarterly FUTA tax payments. As with many other required employment taxes, a payroll service provider can easily automate payments and the form submission. We also recommend talking to a trusted tax pro if you have any questions.