What Is Form 940?
Passed in 1939, the Federal Unemployment Tax Act (FUTA) requires nearly every employer that employs at least one employee to report the salaries and wages they pay to their employees and to pay federal unemployment taxes on a portion of those salaries and wages. The federal government then distributes FUTA tax payments to the states for use along with state unemployment funds to meet each state’s unemployment payment obligations.
Who Needs to File Form 940?
Nearly all employers must file Form 940. According to the IRS’s Instructions for Form 940, any business that pays $1,500 or more in total salary or wages during any quarter of the calendar year or has at least one employee during 20 different weeks of the year must file Form 940 and pay federal unemployment taxes.
The $1,500 in total wages per quarter is not $1,500 per employee. This is the total wages you pay to all employees during the quarter. If you pay $1,500 in total wages during any of January to March, April to June, July to September, or October to December, for example, you must file Form 940 and pay federal unemployment taxes.
If you normally have employees and file Form 940, but you didn’t have any employees during the current tax year, the IRS may still require you to file Form 940 and state you didn’t have any employees during that tax year.
There are, however, some exceptions for employers related to filing Form 940. For instance, household and agriculture employers have different rules for when they must file Form 940, while some types of organizations (e.g., nonprofits, tribal governments, and state and local governments) are exempt from filing Form 940 and paying federal unemployment tax.
How Much Is the FUTA Tax?
The Federal Unemployment Tax Act (FUTA) tax rate is 6.0% of the first $7,000 of each employee’s annual salary or wages plus:
- Adjustments for wages excluded from state unemployment taxes
- Penalties for the late payment of state unemployment taxes
- Reductions of state unemployment tax credits for employers in states deemed a credit-reduction state.
Even though the FUTA tax rate is 6.0% on the first %7,000, you may receive a credit of 5.4%, which effectively lowers the FUTA tax rate to 0.6% if you paid state unemployment taxes on time, and your state isn't a credit reduction state. For most employers that make state unemployment tax payments on time, this equates to $42 per employee per year in federal unemployment taxes.
For employers with salaries and wages excluded from state unemployment taxes and those in credit-reduction states, adjustments of up to 5.4% of the first $7,000 of each employee’s annual wages and salary may apply. This may then bring their full federal unemployment tax rate to 6% or up to $420 per employee per year.
To learn more about the Form 940 tax credit and determine the exact amount you will need to pay, read the IRS’ Form 940 instructions.
When Is Form 940 Due?
The IRS requires employers to file Form 940 by January 31 of each year they pay wages — unless that date falls on a weekend or holiday, in which case it would be due the following business day. However, FUTA tax payments must be paid quarterly throughout the year in each quarter where an employer’s quarterly tax liability or accumulated annual tax liability surpasses $500.
For employers that make all of their quarterly FUTA payments on time, the IRS grants them two additional weeks to file Form 940. In 2022, the due date for filing FUTA returns for these employers was February 10.
Filing Form 940
Businesses can file Form 940 in three different ways:
- By mail
- By efiling with the IRS using an IRS-approved software provider
- By hiring a professional payroll service, accountant, or tax preparer equipped to prepare and efile employer tax returns
If you choose to mail your return to the IRS, the mailing address for Form 940 will depend on the state in which you organized your business and whether or not you plan to include payment. To find the correct mailing address for your state, refer to the IRS’s instructions for Form 940.
If you choose to prepare and efile your federal unemployment tax return yourself, you’ll need to purchase filing software from an IRS-approved provider. The IRS’ list of approved, modernized efile software providers includes most of the large payroll and accounting software developers.
Many businesses outsource their payroll, accounting, and tax returns — and most payroll service providers and accountants will prepare and file your Form 940 for you. Consider using an accounting service like FreshBooks to make this process easier.
When to Make FUTA Tax Payments
The IRS requires businesses to make FUTA payments following each quarter in which their total FUTA tax liability exceeds $500. If a business’s total FUTA tax liability is less than $500 for the quarter, this liability will carry forward to the next quarter until the total accumulated liability equals $500 or until the end of the year when an annual payment is due.
If you’re required to make a FUTA payment, those payments are due at the end of the month that follows the last month of a quarter. For example, FUTA payments for the first quarter are due April 30, while payments for the second, third, and fourth quarters are due July 30, October 31, and January 31, respectively. This allows you one month from the end of each quarter to calculate and pay your FUTA tax.
How to Make FUTA Tax Payments
Employers may make FUTA payments in one of two ways. One option is to make quarterly federal tax payments online, using the IRS’ Electronic Federal Tax Payment System (EFTPS).
The IRS enrolls all employers in the EFTPS when they apply for and receive an Employer Identification Number (EIN). Obtaining an EIN and enrolling in the EFTPS is easy and free. To learn more about getting an EIN for free, read our guide on how to get an EIN.
Alternatively, employers may submit their final quarterly payment along with their Form 940 tax return using Form 940-V, which is simply a payment voucher.
What Are the Penalties for Not Filing Form 940 or Filing Late?
The IRS may impose “failure to file” penalties of 5% of the tax due for each month that Form 940 is filed late — up to a maximum of 25%. In addition, the IRS may impose “failure to pay” penalties of 2% to 15% of the tax due plus interest of 0.5% per month on any unpaid amounts based on how late you pay your federal unemployment taxes.
To learn more about S corp taxes, check out our guide on how to file S corp taxes.