Employers must complete Form 940 in order to document and fulfill their Federal Unemployment Tax Act (FUTA) tax obligations with the IRS. The FUTA tax is used to support government programs which give compensatory payments to unemployed workers. Importantly, the FUTA tax is a cost borne solely by the employer and is not deducted from the employee’s paycheck.
FUTA tax is charged for every employee, and is calculated based on the employee’s total annual wages, which is capped at $7,000. Although Form 940 is an annual filing, there may be an obligation to submit quarterly payments if your tax debt is above a preset IRS level.
Who Needs to File Form 940?
Form 940 has to be submitted if one of the conditions below is satisfied:
- If you have paid $1,500 or more in any one of the calendar quarters, or
- If you had one or more employees for any part of 20 or more separate weeks in the year
This is for full-time, part-time, and temporary employees.
Who does not need to file Form 940?
You shouldn’t have to fill out Form 940 if:
- You fill out Schedule H because you only have household workers
- Your only employees are farm workers and you are below the farm FUTA thresholds
- You are a 501(c)(3) organization (which is exempt from FUTA)
- You are a government employer (state, local, or federal)
There are, however, unique situations for tribal governments, household employers that merge their returns, and successor employers.
What Wages Are Subject to FUTA for Form 940?
The FUTA tax applies to the first $7,000 of wages paid per employee (called the FUTA wage base).
Taxable FUTA wages include:
- Salaries and hourly wages
- Bonuses
- Commissions
- Certain fringe benefits
Wages that are not subject to FUTA:
- Employer contributions to retirement plans
- Qualified fringe benefits
- Group-term life insurance over exclusion limits
- Certain dependent care benefits
- Reimbursements under accountable plans
If wages are exempt from FUTA, they must still be listed properly when completing the form.
How Do You Calculate FUTA Tax?
FUTA tax is based on:
- Standard FUTA rate: 6.0%
- Maximum SUTA credit: 5.4%
- Net FUTA rate: 0.6% (for employers in credit-compliant states)
Step-by-step FUTA calculation
- Determine each employee’s taxable FUTA wages (up to $7,000).
- Add all taxable FUTA wages for the year.
- Multiply total taxable wages by the FUTA tax rate.
- Apply applicable credits for state unemployment contributions.
Example with full FUTA credit
An employer pays 5 employees $20,000 each.
- FUTA wage base: $7,000 × 5 = $35,000
- FUTA rate (after full credit): 0.6%
- FUTA tax: $35,000 × 0.006 = $210
Example with a credit reduction state
If your state owes federal unemployment loan balances, your FUTA tax increases.
For example, a 0.3% credit reduction makes the rate:
- 0.6% + 0.3% = 0.9%
Updated lists of credit reduction states appear annually on IRS.gov.
How Do FUTA Credits Work?
Most employers receive up to a 5.4% credit for timely payment of state unemployment taxes (SUTA). To receive the full credit:
- You must pay SUTA taxes on time
- Wages must be taxable for both FUTA and SUTA
When do credits get reduced?
You will pay more FUTA tax if:
- Your state is on the IRS credit reduction list, or
- You paid SUTA taxes late
Employers in credit reduction states must complete Schedule A (Form 940).
When Are Form 940 Deadlines?
Annual filing deadline: January 31
If you made all FUTA deposits on time, you have until February 10 to file.
However, if your FUTA tax liability exceeds $500 in a quarter, you must deposit by:
- April 30
- July 31
- October 31
- January 31 (for Q4)
If your cumulative liability is $500 or less, carry it forward until it exceeds $500 or pay it with Form 940.
How Do You File Form 940 Step-by-Step?
- Gather payroll and unemployment records
You will need:
- Total wages paid
- FUTA-taxable wages
- State unemployment contributions
- Records of exempt wages
- Quarterly FUTA calculations
- Complete the form sections
Form 940 includes:
- Business information
- FUTA wages
- FUTA tax calculations
- Adjustments for SUTA credits
- Balance due or refund
- Third-party designee
- Signature
- Determine whether you need Schedule A
You must attach Schedule A if:
- Your business operates in a credit reduction state
- You paid SUTA in multiple states
- Submit electronically or mail: The IRS strongly recommends e-file.
- Make FUTA deposits using EFTPS: All federal tax deposits must be made electronically.
What Records Must Employers Keep for FUTA Tax?
The IRS requires employers to keep:
- Payroll records
- Employee wage documentation
- State unemployment payment receipts
- Quarterly FUTA deposit calculations
- Copies of filed Forms 940
Records must be kept for at least 4 years.
What Are Common Mistakes to Avoid with Form 940?
Employers frequently run into issues such as:
- Miscalculating FUTA-taxable wages
- Not applying SUTA credits properly
- Missing quarterly deposit deadlines
- Forgetting to file Schedule A
- Using incorrect wage base thresholds
- Failing to include multi-state calculations
Avoiding these errors reduces penalties and compliance risks.
What Are the Penalties for Filing Form 940 Late?
Penalties apply for:
- Late filing: Typically 5% of unpaid tax per month, up to 25%
- Late deposits: Range from 2% to 15% depending on how late the deposit is
- Interest: Accrues on all late payments and penalties
FUTA penalties can increase quickly, especially for employers in credit reduction areas.
How Do You Amend Form 940?
If you need to correct wage totals, credits, or other information:
- Check Box A (Amended return).
- Complete the form with the corrected figures.
- Attach an explanation of changes.
- Include Schedule R if required.
- File electronically or mail to the “no payment” address.
Where Can You Find the Official IRS Instructions?
Always reference the most current instructions:
- Form 940 (PDF)
- Instructions for Form 940
- Schedule A (credit reduction)
- IRS FUTA Credit Reduction List
- EFTPS for deposit payments
These resources ensure compliance with annual updates.
If you’re not sure whether you owe FUTA or how credit reduction states affect your rate or how to file Form 940 correctly — Dimov Tax can review your payroll & calculate your FUTA liability and file on your behalf — in order to assist you preventing penalty payments. Contact us today for 360-degree support.
FAQ
Do all employers need to file Form 940?
No, other employers only need to meet some requirements to have to file. If you paid $1,500 or more at any point during any calendar quarter, or if you have at least one employee on payroll for at least one day in 20 different weeks throughout the year, you need to fill out IRS form 940. Other types of work, like agricultural or household, have different FUTA rules everywhere else.
What is the FUTA wage base?
The FUTA wage base is set at $7,000 for all employees in a calendar year. Once an employee reaches that wage base, you will no longer have to pay FUTA tax for that employee for the remainder of that year.
What is the FUTA tax rate?
Employers pay FUTA taxes on each employee’s first $7,000 in earnings, and FUTA taxes are charged at a rate of 6.0%. Fortunately, if employers are timely in paying their state unemployment taxes, they are eligible to receive a 5.4% credit which lowers their effective FUTA rate to only 0.6%.
Are SUTA and FUTA the same?
No. SUTA (State Unemployment Tax Act) is a state-level unemployment tax, while FUTA (Federal Unemployment Tax Act) is the federal unemployment tax reported on Form 940. Both fund unemployment benefits, but they are administered separately.
What is a credit reduction state?
A credit reduction state is one that has an outstanding federal unemployment loan balance. When a state fails to repay its federal loan on time, employers in that state lose part of their FUTA credit. This results in a higher FUTA tax rate for affected employers.
Can you file Form 940 electronically?
Yes. Form 940 can be filed electronically through authorized IRS e-file providers. The IRS recommends e-filing because it is faster, reduces errors, and provides confirmation of receipt.