IRS Form 940 Unemployment Tax Report, Explained

Who Must File, the Due Date, and Where to File

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IRS Form 940 is the federal unemployment tax annual report form. If you have employees, you must report and pay unemployment taxes to the IRS. You don't have to deduct these employment taxes from employee pay, but you must set aside amounts for this tax and report it on Form 940. Most employers pay both federal and state unemployment taxes.

What Are Unemployment Taxes?

The Federal Unemployment Tax Act (FUTA), along with state unemployment systems, provides benefits to people who have lost their jobs. The federal law allows the government to tax employers based on employee wages, and to require payments and reports.

In addition to federal unemployment taxes, most businesses also pay state unemployment taxes. The states borrow from the federal government to pay unemployment benefits. 

What Is the Unemployment Tax Rate? 

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

For wages subject to state unemployment, you may receive a credit of up to 5.4%, which makes the FUTA credit rate 0.6%. (The 5.4% is a credit for paying the state unemployment tax.) For most businesses that pay state unemployment tax, the total annual amount of federal unemployment tax per employee is $42 ($7000 x 0.6%).

Each state has its own unemployment tax wage base and rates. Check this list of state unemployment tax rates for information on wage rates. The U.S. Department of Labor has a list of state unemployment agencies.

Who Must File 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, or
  • 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 not owners or partners.

When Is Form 940 Due?

The due date for Form 940 is January 31 for the previous year. For example, for the 2020 tax year, the form is due on January 31, 2021. However, the IRS says that if you deposited all of the FUTA tax when due, you have 10 additional calendar days to file. If January 31 is a weekend or holiday, the Form 940 due date is the next business day.

When Are Form 940 Payments Due?

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

How Do I Make Payments for Form 940 Taxes? 

You must make payments on unemployment taxes, either annually or quarterly, depending on the amount owed. If you owe $500 or more in any one calendar quarter, you must make a deposit.

To make federal unemployment tax payments, you are encouraged to use the Electronic Federal Tax Payment System (EFTPS).

How Do I Complete Form 940?

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

Here's an overview of the process of completing Form 940:

  • Complete information about your business and about your state unemployment tax status.
  • Determine your FUTA tax for the year, and considering any adjustments to gross pay for payments to employees that are exempt from FUTA tax. You will need to know the total payments for all employees for the year, adjust for payments that are exempt from FUTA tax, 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 to see what's due. 

You can get more detailed step-by-step instructions on How to Complete Form 940. You can also see more information in the IRS Instructions for Form 940.

How Do I File Form 940?

You have two options for filing Form 940 with the IRS:

  • You can e-file Form 940 with the IRS in several ways, depending on whether or not you are making a payment.
  • You can also mail in the form. See the IRS instructions for Form 940 for a list of states and addresses for mailing in your Form 940. 

How Is Form 940 Filed for Disregarded Entities?

A disregarded entity is a business that is 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.

The IRS says that a disregarded entity must file Form 940 using the Employer ID of the owner, not the employer ID of the business.

What's the Difference Between Form 940 and Form 941?

These two forms are often confusing, but they are for different types of taxes that employers must pay. Both forms go to the IRS.

  • Form 940 is for reporting and paying unemployment taxes annually.
  • Form 941 is for reporting all payroll taxes quarterly. The payroll taxes included in this report are federal income tax withholding and withholding of FICA taxes for Social Security and Medicare.

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