What Is Form 940 and How Is It Used by Small Businesses?

An employer's Annual Federal Unemployment Tax return, IRS Form 940, is filed once a year with the IRS by businesses with one or more employees. It calculates the employer's federal unemployment tax based on the business's annual payroll.

Understanding IRS Form 940

Each year, every business with employees must file Form 940 to compute the amount of unemployment tax that must be paid on the federal level. This payroll tax is based on the first $7,000 of each employee's wages (including owners of S corporations who receive a salary for work performed for their businesses). This tax is imposed only on the employer; no employee payment or withholding is required.

The form is a two-page return listing the total payments to all employees, reduced by any payments exempt from Federal Unemployment Tax (FUTA), such as certain fringe benefits, group term life insurance, and dependent care assistance.

If an employer has employees in more than one state and/or is subject to credit reduction (explained later), Schedule A of Form 940 is also completed to figure the tax.

Generally, employers receive a credit of 5.4% to figure their FUTA tax, which results in a tax rate of 0.6% (6.0% rate - 5.4% credit reduction = 0.6%). But in a credit reduction state where the state took loans from the federal government to meet its state unemployment benefits liabilities but has not repaid the loans within the allowable time frame, the 5.4% credit is reduced. The reduction in the credit in this case usually is 0.3%, which means that the tax rate becomes 0.9% (6.0% rate - [5.4% usual credit reduction - 0.3% reduced credit reduction rate] = 0.9%). The diminution in the basic credit reduction amount may be even greater for some states, depending on the period of delinquency in repaying their loans.

What Is Form 940 and What Is It Used For?

Although the states pay unemployment benefits for former employees, the federal government provides a backstop. This is done by collecting federal unemployment tax to provide funds to the states when needed to meet their benefits obligations.

The Federal Unemployment Tax Act (FUTA) created a payroll tax for this purpose, and IRS Form 940 is used to report the employer's annual tax obligation.

Filing Form 940 should also alert you to the need to file a state unemployment tax form. If you have a remote worker, you pay this state tax—and file the associated form—in the state where your employee is located and not where your business is based. Multiple remote workers in more than one state means multiple state unemployment tax obligations.

What Is the Difference Between a 940 and a 941 Form?

Don't confuse Form 940, which is an annual employer return for unemployment tax purposes, with other employer returns, such as:

• Form 941, Employer's Quarterly Federal Tax Return, which is used to report wage withholding for income taxes and the employees' share of Social Security and Medicare (FICA) taxes, plus the employer's share of FICA.
• Form 943, Employer's Annual Federal Tax Return for Agricultural Employees, which is used instead of Form 941 to report once a year on the amount of withheld federal income and FICA taxes (the employee and employer share).
• Form 944, Employer's Annual Federal Tax Return, which is filed instead of the quarterly employer returns if the employer is "small." This applies to employers with annual tax liability withheld federal income tax, FICA (employee and employer share) totaling $1,000 or less.

Filing Federal Form 940

Form 940 is filed once a year, regardless of whether the business has laid off any workers and has been notified by the state that employment benefits have been claimed. It can be filed electronically or, in some cases, on paper.

Do I Need to File Form 940 for My Business?

A business must file Form 940 if it paid at least $1,500 in wages during any calendar quarter (January through March, April through June, July through September, and October through December) or the business employed one or more employees for any part of 20 or more different weeks in the current or previous year. The basic federal unemployment tax rate is 6% on the first $7,000 of each employee's wages for the entire year. However, there is a credit for state unemployment taxes of up to 5.4%, which brings the net tax rate to 0.6%.

An employer with employees in more than one state or a location in a credit reduction state must file Schedule A of Form 940.

When Is Form 940 Due?

Your 940 tax form is due at the end of January, following the year wages were paid. For 2024, the Form 940 due date is January 31, 2025. This form is filed annually, even though tax payments may have to be made quarterly.

When and Where to Make the Payment

Even though Form 940 is filed once a year, an employer may have to make quarterly tax deposits. A quarterly payment must be made if the federal unemployment tax is more than $500 for the quarter. The deposit must be made by the last day of the month after the end of the calendar quarter. So, if an employer's federal unemployment tax totals $600 based on payroll for January through March, the tax must be deposited by April 30.

If the quarterly liability is $500 or less in a quarter, it carries over to the next quarter. If liability for the first quarter of the year is $400, this carries over and is added to the liability in the second quarter to determine whether a payment is required.

If quarterly payments are required, they must be deposited with the federal government. This can be done through EFTPS, a free and secure online federal tax payment program.

An annual tax payment will suffice for small businesses with 11 employees or fewer because the quarterly payment threshold will not be surpassed. For example, if you have 5 employees who receive compensation in the first quarter of $10,000 (only the first $7,000 counts), $8,000 (only the first $7,000 counts), $6,000, $4,000, and $1,000, respectively, no payment for this quarter is due. The tax liability for this quarter is $150 ($25,000 x .006), which is less than the $500 payment deposit threshold.

How To File a Federal Form 940

If you use a CPA or other tax return preparer who files more than 10 information returns in the 2025 filing season, your Form 940 must be e-filed, with limited exceptions.

If you want to e-file Form 940, you must purchase IRS-approved software from a list of providers. You may also have to pay a fee to file electronically.

If you file the return on paper, it must be sent to the address listed in the instructions on Form 940. The address is based on the employer's location and whether the form is accompanied by a payment. The address can change yearly, so verify this before mailing.

How Do I Avoid Penalties for My Business?

Attending to employer responsibilities for federal unemployment tax can help avoid penalties and interest. This means:

• Filing Form 940 by the due date (and ensuring it's complete and accurate).
• Depositing the total amount of federal unemployment tax due when required (and ensuring the deposits are honored by your financial institution that payments are drawn upon).

Form 940 Instructions

Form 940 is simple to complete if you have all the required information.

1. Enter your business name, address, and Employer Identification Number (EIN). If you're a sole proprietor, enter your name on the "name" line, with your trade name on the "trade name" line. No entry is required on the trade name line if the business's name and trade names are the same.
2. Indicate the type of return being filed if necessary. This includes checking a box to show it's an amended return, a return for a successor employer, a return with no tax liability because there were no wages paid during the year, or if the business has closed and stopped paying wages (so the IRS won't be looking for an unfiled return in the following year).
3. Figure the tax by entering total payments to all employees, reduce this by payments exempt from the tax (e.g., employer payments of health coverage, employer contributions to qualified retirement plans), and then enter the total costs to each employee over $7,000 to arrive at taxable wages. Multiply this amount by 0.006 to determine the tax before adjustments.
4. Make any required adjustments, such as credit reduction amounts described earlier.
5. Determine the final tax due and whether there's a balance due or an overpayment based on deposits made for the year. If any balance owing is $500 or more, it must be deposited (as explained earlier). If the balance due is less, it can be deposited and paid with the return using a check, a credit or debit card, or an electronic fund transfer. If there's an overpayment because too much has already been deposited, it can be refunded or applied to the following return.

Keeping Track of Your Unemployment Taxes

One important employer responsibility is keeping track of unemployment taxes and filing the 940 tax form on time. A payroll tax services provider can simplify these responsibilities.