What Is IRS Form 940?

IRS Form 940 Explained

Man seated at a desk covered with paperwork taking to an employee

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IRS Form 940 is the federal unemployment tax annual report. Employers must report and pay unemployment taxes to the IRS for their employees. They don't deduct these employment taxes from employee pay, but they must set aside the appropriate amount and report it on Form 940.

In conjunction with state unemployment systems, the Federal Unemployment Tax Act (FUTA) provides benefits to people who have lost their jobs through no fault of their own. The law allows the government to tax employers based on employee wages so as to provide for these benefits, and it requires that employers make FUTA tax payments and report those payments on Form 940.

What Is Form 940?

IRS Form 940 computes the amount of federal unemployment tax liability of a business for the previous year. The form also is used to determine the amount of unemployment tax owed for the previous year, as well as any unpaid and due unemployment taxes. 

IRS Form 1040

Who Uses Form 940?

Your business must file Form 940 if you paid wages of $1,500 or more to employees in a calendar quarter of the year as of 2020. You must also do so if you had one or more employees for at least some part of a day in any 20 or more different weeks in either of the past two years.

Employers must count all full-time, part-time, and temporary employees, but they don't have to count owners or partners.

Unemployment tax payments are based on employee wages and salaries at a rate of 6.0%, up to a maximum of $7,000 in wages per year per employee. This is the FUTA wage base.

But you can receive a credit of up to 5.4% for wages that are subject to state unemployment, and this cuts the FUTA tax rate to 0.6%. The 5.4% is effectively a credit for paying the state unemployment tax. The total annual amount of federal unemployment tax per employee works out to $42—$7,000 x 0.6%—for most businesses that pay state unemployment tax.

Where to Get Form 940

Form 940 is available online at the IRS website. You can download it, or you can print it out before or after you complete it. The form is interactive so you can fill it out on the website.

How to Fill Out Form 940

Form 940 can be completed in a few relatively steps, although some of the calculations might be challenging.

  • Provide information about your business and your state unemployment tax status.
  • Determine your FUTA tax for the year considering any adjustments to gross pay to employees that are exempt from FUTA tax. You'll need to know the total payments for all employees for the year, adjust for payments that are exempt from FUTA, and subtract payments in excess of $7,000.
  • Calculate adjustments for state unemployment tax payments.
  • Compare the amount of unemployment tax you owe to the amount already paid in to determine how much is currently due.

The IRS provides more detailed step-by-step instructions in its Instructions for Form 940.

Can Form 940 Be e-Filed?

You can e-file Form 940, but you must purchase or use IRS-approved software to do so. Your other option is to use an authorized IRS e-file provider. You can search for one by location on the IRS website.

Where to Mail Form 940

You can also mail in the form if you prefer not to e-file. The IRS provides a list of addresses for each state on its website. The correct address will depend on whether you're also mailing a payment.

Requirements for Form 940

Form 940 is due to the IRS by January 31 for the previous year, so the form would be due on January 31, 2021 for the 2020 tax year. You have 10 additional calendar days to file, however, if you deposited all of your FUTA tax when it was due.

Form 940 is due the next business day if January 31 falls on a weekend or a holiday.

Your tax payments might be due before the due date for the 940 report form. You must deposit at least one quarterly payment if your FUTA tax is more than $500 for the calendar year. You can carry the unpaid balance over to the next quarter if your FUTA tax for a quarter is less than $500. You must make a quarterly payment when the cumulative unemployment tax due is more than $500.

The IRS suggests using the Electronic Federal Tax Payment System (EFTPS) to make federal unemployment tax payments.

A disregarded entity must file Form 940 using the Employer ID of the owner, not the employer ID of the business, according to the IRS. A disregarded entity is a business that's separate from its owner, but which elects to be disregarded as separate from the business owner for federal income tax purposes. The most common disregarded entity is a single-member LLC.

Key Takeaways

  • IRS Form 940 reports an employer’s unemployment tax payments and calculations to the IRS.
  • The form is required if you paid wages of $1,500 or more to employees in a calendar quarter, or if you had one or more employees for part of a day in any 20 or more different weeks in the last two years.
  • The previous year's Form 940 is due to the IRS by January 31.
  • Some tax payments can be due prior to filing Form 940 with the IRS.

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