From the day you hire your first W-2 employee and run payroll for your business, a lot of new responsibilities and complexities spring up. From payroll forms to employment taxes, there’s a lot to figure out—and if you looked to the Internal Revenue Service (IRS) website for clarity, you probably left still feeling confused and unsure.
That’s why we’re here to demystify all that goes into running payroll and the taxes and forms that come along with it.
Here, we’re explaining IRS Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, including:
- What Form 940 is
- Why the IRS requires employers to file it
- How to figure out if you need to file Form 940
- When and how to fill out and file Form 940
What is Form 940?
If you’re in a rush, here’s the gist:
- What’s reported on Form 940: Federal unemployment (FUTA) tax
- When it’s filed: Annually
- Who needs to file: Most employers in the U.S.
Simply put, Form 940 is a document the IRS collects from employers annually. The form is designed to help both small businesses and the IRS get on the same page about the Federal Unemployment (FUTA) tax owed.
On the form, employers report the wages they paid to full-time and part-time (W-2) employees throughout the year—up to $7,000 per employee. Then, the corresponding FUTA tax is calculated to figure out how much the business owes to the IRS.
How is Form 940 different from Form 941?
If you’re thinking, “Gee, that sounds a lot like Form 941,” you’re right. The two IRS forms are similar. However, Form 940 is filed annually and it only reports an employer’s FUTA taxes. Form 941, on the other hand, reports federal income tax withholding and Federal Insurance (FICA) taxes—and it’s filed every quarter.
The key difference here is that Form 941 is how you report withholding and shared taxes (those that are split 50/50 between the employee and employer). Form 940 reports FUTA tax, which is paid entirely by the employer.
How is Form 940 different from Form 944?
Similarly, Form 944 is an alternative to Form 941. It’s used instead of Form 941, by small employers whose annual FICA and withholding tax liability is less than $1,000. Like Form 940, it’s filed only once per year, but it reports FICA and withholding taxes—not FUTA.
Why the IRS requires employers to file Form 940
Employers in the United States are required to pay into Federal Unemployment benefits for their employees. This fund enables employees to collect unemployment compensation should they be laid off or let go for reasons unrelated to their performance.
To calculate how much FUTA tax an employer owes, the IRS uses Form 940 and requires the majority of employers to file it every year. The form helps both the IRS and individual employers understand and keep track of FUTA tax owed and paid throughout the year.
Wait—what’s FUTA tax anyway?
Let’s back up for a minute. You might be wondering what this “FUTA tax” actually means. When it comes to payroll and employment taxes, there are three main types of tax:
- Withholding taxes: These are taxes your employee’s pay on their income—but you’re responsible for withholding them from employee paychecks and depositing them to the correct tax authority.
- Employer taxes: As the name implies, you, the employer, are responsible for paying the entirety of these taxes.
- Shared taxes: These taxes are split between you and your employees. Again, it’s your responsibility to withhold the employee’s portion and deposit the full amount (your portion and theirs) to the appropriate tax authority.
Federal Unemployment (FUTA) tax falls into that middle category—employer taxes—meaning you pay the full tax amount. FUTA tax is calculated based on a percentage (set by the federal government) of the wages you pay to each employee. For the past few years, the standard FUTA tax rate has been 6%.
However, you only pay FUTA tax on the first $7,000 paid to each employee. After their pay surpasses that threshold, you won’t incur any additional FUTA liability. In other words, the maximum FUTA tax you can be liable for is $420 (6% of $7,000) per employee.
Do I need to submit Form 940?
Now that you have a better understanding of what Form 940 is and why it’s used, you might be wondering if you have to file it. It’s important to note that not all employers in the U.S. are required to file Form 940… but most are.
- Paid $1,500 or more in wages to any W-2 employee (not a contractor) OR
- Had one or more W-2 employees (full-time or part-time) for at least 20 weeks out of the past year
Then you’re required to pay FUTA tax and file Form 940.
The U.S. Chamber of Commerce highlights the few exceptions to this rule, noting that “non-profits, religious organizations and other 501(c)(3) accredited firms are exempt from paying this tax.” The other exemption is for businesses that work exclusively with independent contractors and not W-2 employees.
If you’re feeling unsure about whether or not you’re required to pay FUTA tax or file Form 940, it’s best to talk with a tax professional about your small business and its requirements.
How to fill out Form 940
Assuming you aren’t one of the few businesses exempt from filing Form 940, let’s talk about how to do just that. To start, you’ll need to have a few key pieces of information at the ready:
- The current FUTA tax rate: For 2019 (and the last few years), the FUTA tax rate is 6%.
- The maximum FUTA threshold: You’ll only pay that 6% FUTA tax on the first $7,000 paid to each employee.
- The number of employees you had during the year
- Total salary paid to each employee
- How much you paid in state unemployment (SUTA) tax for the year
Calculating how much FUTA tax you owe
When you boil it down, this is what Form 940 is all about—calculating the correct amount of FUTA tax for you to pay the IRS.
At its most basic, the formula looks like this:
[6% FUTA tax rate] x [# of employees] x [$7,000 maximum taxable amount]
So let’s say your small business employed 20 people over the course of the year and they each made $30,000. Your FUTA liability would work out like this:
6% x 20 employees x $7,000 = $8,400 owed
Throughout the previous year, you were responsible for paying $8,400 in FUTA tax. From there, you simply subtract any FUTA payments you already made during the year (most small businesses are required to make quarterly deposits) to find what you still owe.
Credit for SUTA tax paid
In addition to FUTA tax, most employers are also responsible for paying state unemployment (SUTA) tax, too. Before you get overwhelmed, know this: You can typically claim any SUTA tax paid as a credit off of your FUTA tax bill.
For example, the FUTA tax rate is 6%. If you pay 4% in SUTA tax to your state, you’ll only have to pay the remaining 2% to the federal government. Most employers are eligible to receive credit for up to 5.4% in SUTA tax—meaning your FUTA tax could be as low as 0.6%.
Using our example above, your total taxable FUTA wages were:
$7,000 x 20 employees = $140,000
With the 0.6% rate, adjusted for SUTA tax credit, your FUTA tax liability becomes $840 instead of $8,400. Much better, right?
You’ll claim SUTA tax via lines 1a and 1b on Form 940, by entering the abbreviation of any and all states to which you paid SUTA tax.
On line 8, you’ll notice that your total taxable FUTA wages are multiplied by 0.6%—crediting you for up to 5.4% in SUTA taxes.
When to submit Form 940
IRS Form 940 is an annual filing—meaning you only have to complete and file it once per year. For the majority of small businesses, the form for the prior year is due on January 31st of each year.
However: It’s important to remember that Form 940 taxes must be paid quarterly if you owe $500 or more in FUTA tax for that quarter (or cumulatively for the year).
If your quarterly liability is less than $500, you can carry that balance over to the following quarter—until the total liability surpasses that $500 threshold. Once that happens, you’ll need to pay the full balance in that quarter.
Quarterly payment deadlines fall on the last day of the month following each quarter—so January 31st, April 30th, July 31st, and October 31st.
How to submit Form 940 and make your FUTA tax payments
When it comes to submitting Form 940 and making your FUTA tax payments, small businesses have a few options to choose from. You can:
- E-file and pay online
- Mail in your form and payments
- Work with an account to file for you
- Any combination of the above
E-file and pay online
As the IRS explains it, the chief benefits of e-filing are:
- Security and accuracy
- Acknowledgement of tax form acceptance within 24 hours
To file Form 940 (or any other IRS form) online, you’ll need to either use a tax software or work with an authorized e-file tax professional. The IRS provides a list of their approved software and a database of authorized e-file providers for you to choose from.
To pay your full FUTA tax balance or make quarterly deposits online, you’ll use the Electronic Federal Tax Payment System (or EFTPS).
If you’re working with a tax software or professional, you can also choose to make your payments via Electronic Funds Withdrawal (or EFW). With this option, you can both e-file and authorize payment in one step.
Mail in your form and payment
Small businesses also have the option of mailing in Form 940 and their FUTA tax payments. However, if your FUTA balance is more than $500 during the fourth quarter, you’ll need to pay electronically.
To mail in your form and payment, print both Form 940 and Form 940-V, the payment voucher. Mail these, along with your payment, to the address listed for you state. You can find the correct mailing address on pages 4 and 5 of the Instructions for Form 940.
Work with an accountant to file for you
Your last option for filing Form 940 and making corresponding payments or deposits is to work with an accountant or other tax professional who can file both the form and payment for you. Typically, this is done via the Electronic Funds Withdrawal (EFW) system we mentioned above.
To wrap up here, these are the basics and the main takeaways the average small business owner and employer needs to know about IRS Form 940:
- Form 940 reports the amount of Federal Unemployment Tax (FUTA) an employer must pay
- Employers who’ve paid $1,500 or more to any W-2 employee OR had at least 1 employee for 20 or more weeks of the year must file Form 940