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Employers have several payroll tax responsibilities, including paying federal unemployment tax. If your small business has employees, you may be required to file IRS Form 940 to report your annual Federal Unemployment Tax Act (FUTA) liability.
Understanding Form 940 can help you calculate the tax correctly, meet filing deadlines, and avoid potential penalties. Here’s what business owners need to know about Form 940, who must file it, and when FUTA payments are due.
What Is Form 940?
Form 940, officially called the Employer’s Annual Federal Unemployment (FUTA) Tax Return, is the IRS form employers use to report their federal unemployment tax for the calendar year.
FUTA tax helps fund unemployment compensation programs for eligible workers who lose their jobs. Employers generally pay FUTA tax in addition to applicable state unemployment taxes.
Unlike Social Security and Medicare taxes, FUTA tax is paid entirely by the employer. It must not be withheld from employees’ wages.
For 2025, the FUTA tax rate is generally 6% on the first $7,000 of wages paid to each employee during the calendar year. Most employers can claim a credit of up to 5.4% for qualifying state unemployment taxes, potentially reducing the effective federal rate to 0.6%. The actual rate may be higher if the employer does not qualify for the full credit or other special rules apply.
Who Needs to File Form 940?
Most employers must file Form 940 if they meet either of the following general FUTA requirements for the current or preceding calendar year:
· Wage test: The business paid employees $1,500 or more in wages during any calendar quarter.
· Employee test: The business had one or more employees working for at least part of a day during 20 or more different weeks.
When counting employees, employers generally include full-time, part-time, and temporary workers. Special rules apply to household employees, agricultural workers, and certain other employers.
Even if your business has only a few employees, you should review these requirements to determine whether a Form 940 filing is necessary.
When Is Form 940 Due?
Form 940 is generally due by January 31 following the calendar year being reported. If the deadline falls on a Saturday, Sunday, or legal holiday, the due date moves to the next business day.
For example, the deadline to file the 2025 Form 940 was February 2, 2026. Employers that deposited all FUTA tax on time were allowed until February 10, 2026, to file the return.
For future filing years, confirm the applicable deadline in the current IRS instructions.
FUTA Tax Deposit Deadlines
The Form 940 filing deadline is separate from the deadlines for depositing FUTA tax. If your accumulated FUTA tax liability exceeds $500, you generally must deposit the amount by the last day of the month following the end of the quarter.
The standard quarterly deposit schedule is:
· First quarter: April 30
· Second quarter: July 31
· Third quarter: October 31
· Fourth quarter: January 31 of the following year
If the undeposited tax is $500 or less at the end of a quarter, you generally carry it forward to the next quarter instead of making a deposit. If the cumulative amount exceeds $500, a deposit is required. When the fourth-quarter liability remains $500 or less, you can generally pay it with Form 940 by the filing deadline.
Federal tax deposits must generally be made electronically. If a deposit deadline falls on a weekend or legal holiday, the next-business-day rule generally applies.
How to Complete and File Form 940
You can obtain Form 940 and its instructions from the official IRS website. Before preparing the return, gather your payroll records and information about state unemployment tax payments.
1. Gather Your Payroll Information
Collect the information needed to calculate your FUTA tax, including:
· Total wages paid to employees during the year.
· Payments exempt from FUTA tax, where applicable.
· Wages exceeding the $7,000 annual FUTA wage base for each employee.
· State unemployment contributions and information needed to determine eligible credits.
· FUTA deposits already made during the year.
Accurate payroll records help ensure that you report the correct taxable wages and claim only the credits for which your business qualifies.
2. Calculate Your FUTA Tax
Determine each employee’s wages subject to FUTA tax, taking into account the annual wage limit and applicable exemptions. Then calculate the tax using the appropriate rate and any eligible state unemployment tax credit.
The standard federal rate is 6%, but employers that qualify for the maximum 5.4% credit generally have an effective rate of 0.6%.
Certain employers may owe tax at a higher effective rate, including those affected by state credit-reduction rules.
3. Report Deposits and Calculate the Balance
Enter the required wage, tax, credit, and payment information on Form 940. Subtract the FUTA deposits already made from the total tax liability to determine whether an additional payment is due or whether the account has an overpayment.
If the remaining balance is more than $500, the applicable deposit rules generally require an electronic deposit. Smaller balances may be paid with the return, subject to IRS payment requirements and deadlines.
4. Submit Form 940 to the IRS
Follow the current IRS instructions to file Form 940 electronically or by mail, where permitted. If you owe additional tax, make sure the payment is submitted using an approved method and by the applicable deadline.
Keep a copy of the filed return, payroll reports, deposit confirmations, and state unemployment tax records for your business files.
Common Form 940 Filing Mistakes to Avoid
Employers can reduce errors by watching for these common issues:
· Missing the deadline: Filing late or making required deposits late can result in penalties and interest.
· Miscalculating FUTA wages: The tax generally applies only to the first $7,000 of each employee’s annual wages, after accounting for applicable exemptions.
· Claiming an incorrect state tax credit: The credit depends on qualifying state unemployment tax payments and other rules.
· Overlooking quarterly deposits: Filing annually does not mean that all FUTA tax can always wait until January.
· Reporting incorrect payroll information: Inaccurate wage totals or incomplete payment records can lead to errors on the return.
Review your calculations and reconcile payroll records with your tax deposits before submitting the form.
How Contnow Tax Preparation LLC Can Help
Managing payroll taxes requires attention to employee wages, tax calculations, deposit schedules, and annual reporting requirements. Understanding these responsibilities can help small businesses stay organized and reduce the risk of filing errors.
Contnow Tax Preparation LLC can help business owners understand tax preparation requirements, organize relevant records, and identify payroll tax compliance issues to review with a qualified tax professional.
With accurate records and a clear filing process, employers can approach Form 940 preparation with greater confidence.
Final Thoughts
Form 940 is an important annual filing for employers subject to federal unemployment tax. Knowing the filing requirements, calculating FUTA liability correctly, and making required deposits on time can help your business meet its federal payroll tax obligations.
Review the latest IRS Form 940 instructions each year because filing dates, credit-reduction rules, and other requirements may affect your return.
Do you have any other questions? Send us an email at 📧 info@contnowtax.com and we’ll get back to you as soon as possible.
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