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Updated: February 4, 2023
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.
Above is a fillable PDF version of Form 940 that you can print or download.
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:
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).
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.
While your business only has to file Form 940 once a year, it probably needs to make quarterly FUTA tax payments. Any business that owes more than $500 in FUTA taxes should use the Electronic Federal Tax Payment System to submit quarterly payments by the end of April, July, October, and January. And keep tabs on those payments to make sure everything adds up at the end of the year.
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.
To complete Form 940, you’ll need the following:
There are currently seven parts that need to be completed for a 940. Here are the line by line instructions:
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.
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
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
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
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
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
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.
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.
You can also learn more about FUTA, in our detailed guide: What is the FUTA Tax? For more information on Form 940, visit the IRS website.