Q: What’s Form 940? Am I Required to File It?

Form 940 is a tax form that allows employers to report their annual FUTA (Federal Unemployment Tax Act) tax.

Most employers that have employees need to file this form (or have a payroll provider file it for them).

Hold up. What is the FUTA tax?

Here’s a quick TL;DR on the FUTA tax:

• It’s a tax that employers pay.

• It can’t be collected or deducted from your employees’ wages.

• When workers in your state lose their job and file for unemployment, their compensation is funded by this FUTA tax along with your state’s unemployment tax.

• Religious, charitable, and other 501(c)(3) organizations are exempt from paying the FUTA tax and do not have to file Form 940.
• There are also special rules for:
  • Family businesses that employ family members who are under the age of 21.
  • Individuals with household employees (for example, a childcare provider).
  • Agricultural employers who paid $20,000 or more to farmworkers in any one quarter during the previous or current calendar year—or if you employed 10 or more agricultural workers during any part of any day in the previous or current calendar year.

Do I need to pay the FUTA tax and file Form 940?

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You’re required to file Form 940 if either of the following is true:

• You paid wages of $1,500 or more to W-2 employees during any calendar quarter of 2020 or 2021; or

• You had a W-2 employee work any amount of time for 20 or more weeks of the year in 2020 or 2021. This includes full-time, part-time, and temporary employees—and the 20 weeks do not have to be consecutive.

How much FUTA tax do I have to pay?

The FUTA tax rate has remained unchanged since 2011, but it is always possible that the rate may change so be sure to stay up to date:

Year	FUTA Tax Rate
2022	6%
2021	6%
2020	6%
2019	6%

Keep in mind that you only pay this tax on employees—not independent contractors.

You only owe FUTA tax on the first $7,000 you pay to each employee per year, excluding any exempt payments. Payments exempt from FUTA include things such as health insurance and life insurance costs and workers’ compensation.

For example, say you have ten employees, and you pay all of them more than $7,000 in taxable payments per year. You would multiply the maximum taxable amount per employee ($7,000) by the number of employees (10), and then multiply that by the tax rate of 6 percent.

However, in most states, you can receive a tax credit that reduces your FUTA tax liability. If you’re in an eligible state and you pay your state unemployment tax on time, you may be able to get a credit for your FUTA tax for up to 5.4 percent, meaning you’ll only pay 0.6 percent in FUTA taxes.

This part can get tricky though, so check with a financial expert to see if your business is eligible for this credit. You can also learn more about the FUTA tax here.

How do I fill out Form 940?

Follow the instructions exactly as they are written. Most of the questions are pretty straightforward, and we’ve listed out the areas where people tend to get stumped below.

Top section

Employer Identification Number: Be sure to use your Employee Identification Number (EIN) here, per the instructions. Do not use your social security number or individual taxpayer identification number (ITIN) (unless you are a disregarded entity; if so, use the owner’s social security number or ITIN—do not use the tax ID of the business). Failure to provide your valid EIN may result in processing delays and/or penalties.

Trade name and address: This one is pretty simple … unless you’ve made a business name or address change. Always contact the IRS regarding name and/or address changes. You may need to apply for a new EIN if you’ve changed your business name. See Publication 1635: Understanding Your EIN for more information about updating an EIN. 
Additionally, you may need to file Form 8822-B if you’ve changed your business address. Always touch base with your tax pro before you make any changes.

Part 1

Multi-state employers: If you’re not sure if you’re a multi-state employer—say you have a complicated new situation (like employees live in one place but technically work in another place)—then you’ll want to check in with your tax pro. There are a number of factors to consider in this kind of scenario, like where the employee performs work and the location from which they are managed. 

CREDIT REDUCTION: When the IRS writes something in ALL CAPS it’s eye-catching for sure—and for some of us it raises blood pressure. Don’t worry. It’s really not so scary or complicated. We’re going lower the caps when we talk about credit reduction now so that we’re not shouting anymore. So, how does a state get a credit reduction, and how do you know if your state is impacted? When a state has a credit reduction, it means that it borrowed money from the federal government to pay unemployment benefits and hasn’t paid the feds back yet. The U.S. Virgin Islands was the only one on the list for 2020. For 2021, the Department of Labor has a list of potential credit reduction areas.

The following states have outstanding federal unemployment benefit loans as of Feb. 24, 2021:

• California
• Colorado
• Connecticut
• Georgia
• Hawaii
• Illinois
• Kentucky
• Louisiana
• Massachusetts
• Minnesota
• Nevada
• New Jersey
• New Mexico
• New York
• Ohio
• Pennsylvania
• Texas
• U.S, Virgin Islands
• West Virginia.  

Part 2

In this section, you only fill out the applicable boxes.

Total payments to all employees means all payments to employees for the calendar year. It doesn’t matter how you paid them (cash, check ACH), or how their pay was calculated (hourly or salary), or even whether the payment was exempt from FUTA or not. The amount you enter here is the total amount you paid to employees for services rendered during the calendar year.

Payments exempt from FUTA includes some examples of common payments that are exempt from FUTA tax. Exempt categories do change from time to time, so be sure to check for updates every time you file. For instance, from 2017–2026, moving expense reimbursements and bicycle commuter reimbursements are no longer exempt from FUTA tax due to the Tax Cuts and Jobs Act. 

Fringe Benefits include sick pay (see IRS Publication 15-A for details), non-cash benefits such as food, lodging, and clothing, and Section 125 (cafeteria) plan benefits.

Retirement/Pension includes employer contributions to eligible 401(k) programs, payments to Archer Medical Savings Account (MSA), payments to adoption assistance programs, and more.   

Dependent Care includes payments up to $5,000 per employee (or $2,500 for those who are married and filing separately) for the care of a qualifying person—such as an employee’s minor children—while your employee is working. See IRS Section 129 for details. 

Other includes things like tips over $20 that employees have reported to you. 

Check out the IRS Form 940 instructions for more details on every section, including exemptions. The remaining sections of Part 2 is a math exercise, so grab your calculator and fill in those boxes. 

Part 3

If #9 applies to you, then #10 and #11 will not apply. Leave any section that does not apply blank.
If #10 applies to you, then you have a worksheet to do. Head over to the IRS Form 940 instructions. The worksheet is on page 10.

Part 4

Part 4 asks you to double check your payments/overpayments and do a little math to figure out if you owe the IRS money, or if you overpaid.

Part 5

Part 5 asks for your quarterly payments if line 12 was more than $500. This is where you high-five yourself or your finance person for keeping excellent records and sending in those quarterly payments. If line 12 doesn’t match line 17, you’ll need to revisit your earlier calculations.

Part 6

You’re in the homestretch! If you designate a third party in section 6, they may be able to respond to certain IRS notices and provide any missing or corrected information needed. They will not, however, be authorized to receive your refund check (if that’s applicable to you).

Part 7

You know what to do here. You’ve got this.

When and where do I have to submit Form 940?

Form 940 covers a standard calendar year, and the form and payment are due annually by January 31 for the prior year.

There may be earlier payment deadlines, however.

If your FUTA tax liability exceeds $500 for the calendar year, you have to make at least one quarterly payment. If you owe less than $500 for any one quarter, you can roll your balance over to the next quarter until you owe at least $500.

If your total FUTA tax liability is less than $500 for the entire calendar year, you can just submit one Form 940 with your payment by the January 31 deadline. If you’ve already paid the full amount due, you can turn the form in as late as February 10.

If you file late, the penalty is typically 5% per month of the unpaid balance due. More details about penalties and interest are available on IRS Notice 746.

To file and make a payment online, you can use the IRS Electronic Funds Withdrawal (EFW) system. 

If you’ll be mailing the paper form, the IRS address you’ll use depends on where you’re located and whether you’re including a payment with your form. The filing addresses change from time to time, so be sure to double check this IRS web page before mailing your form.

At the time of writing, below are the current IRS mailing addresses to file Form 940: