Form 940 is the annual federal return employers use to report Federal Unemployment Tax Act (FUTA) tax. FUTA is an employer payroll tax that helps fund unemployment compensation alongside state unemployment programs. Employers use the form to report taxable wages and calculate the federal tax due after applicable credits and adjustments. They also reconcile the annual liability with deposits already made and report any remaining balance or overpayment. FUTA is not deducted from employees’ pay. Form 940 is separate from returns that report federal income tax withholding or Social Security and Medicare taxes. Whether an employer must file depends on its wages and employment activity during the year. The current IRS form and instructions provide the rules for determining what to report and how to calculate the tax.
Table of Contents
- Who Must File Form 940?
- What Wages and Tax Does Form 940 Cover?
- How Does State Unemployment Tax Affect the Return?
- How Is Form 940 Prepared and Filed?
- How Does Form 940 Relate to Contingent Workforce Payroll?
- What Records and Corrections May Be Needed?
Who Must File Form 940?
Most employers must file Form 940 if they paid at least $1,500 in wages during any calendar quarter of the current or preceding year. An employer may also have to file if it had at least one employee for some part of a day in 20 or more different weeks during either year. These are separate tests. Meeting either one can create a filing obligation.
The tests focus on employee work and wage payments rather than a business’s legal structure or payroll schedule. The IRS explains the tests and exceptions in its Instructions for Form 940. Employers should consult the instructions for the relevant tax year because the facts that determine whether a worker counts can depend on the type of work and the employer.
Some employers and payments receive different treatment. Services performed by employees of state or local governments are generally exempt from FUTA. Household employers may report federal unemployment tax on Schedule H with an individual income tax return instead of filing Form 940. A small payroll does not by itself establish that no return is required. Employers should check the applicable rules before concluding that an exception applies.
What Wages and Tax Does Form 940 Cover?
FUTA generally applies to the first $7,000 of eligible wages paid to each employee during a calendar year. The calculation excludes payments that are exempt from FUTA. The federal tax rate is generally 6%, and employers may receive a credit of up to 5.4% for qualifying state unemployment contributions. This commonly results in a net rate of 0.6%, although the amount an employer owes depends on its wages and applicable credits.
The FUTA rules differ from those for Social Security tax and federal income tax withholding. For example, if an employee receives more than $7,000 in eligible wages during the year, the employer generally does not calculate FUTA on that employee’s wages above the federal wage limit. State unemployment programs may use different wage limits and eligibility rules. As a result, a worker’s state-taxable wages and FUTA-taxable wages may not match.
Employers need payroll records that distinguish eligible FUTA wages from exempt payments and wages above the federal limit. Treating all payroll as FUTA-taxable can overstate the amount due. Excluding payments without confirming their treatment can understate it. The annual return should reflect the applicable federal rules for each payment and employee.
How Does State Unemployment Tax Affect the Return?
FUTA is a federal tax, while state unemployment insurance tax is administered under state law and is commonly called SUI. An employer may owe both taxes. Qualifying state unemployment contributions can reduce the federal FUTA tax through a credit. Generally, the employer must pay qualifying state contributions by the applicable Form 940 due date to claim the associated credit. Late or unpaid state tax may reduce the credit and increase the federal amount due. The IRS Form 940 instructions explain the credit and related rules.
Employers that paid wages in more than one state generally complete Schedule A with Form 940. The schedule identifies relevant states and helps calculate state-specific adjustments. A credit reduction may also apply to wages in a state that has not repaid certain federal unemployment loans. In that situation, the employer’s FUTA credit may be reduced, increasing the federal tax. The IRS provides information about the FUTA credit reduction and how to report it.
State unemployment reporting remains a separate responsibility from the federal return. Employers should keep records of state contributions and confirm that payments qualify for the federal credit. The fact that an employer filed state reports does not by itself determine the amount of credit available on Form 940.
How Is Form 940 Prepared and Filed?
Preparation starts with a review of the employer’s payroll records for the tax year. The employer identifies eligible payments and exemptions, calculates each employee’s FUTA-taxable wages, and determines the resulting tax. It then applies available state unemployment credits and any required adjustments. The form reconciles the annual liability with deposits already made and shows whether a balance remains or an overpayment resulted.
Form 940 is an annual return, but employers may need to deposit FUTA tax during the year. If the liability exceeds $500 at the end of a quarter, the employer generally must deposit the accumulated amount by the last day of the following month. Smaller amounts carry forward until the threshold is exceeded. The usual filing deadline is January 31 after the calendar year. If all tax was deposited on time, the IRS generally allows an additional 10 calendar days to file.
For the 2025 return, the IRS lists February 2, 2026, as the regular due date and February 10, 2026, when all FUTA tax was deposited on time. Deposit deadlines and filing deadlines serve different purposes. Employers should verify the current year’s dates and deposit requirements in the applicable IRS instructions.
How Does Form 940 Relate to Contingent Workforce Payroll?
For organizations using contingent workers, an important practical question is which entity is treated as the employer for payroll tax purposes. That determination affects who reviews wage records, decides whether FUTA applies, and files any required Form 940. A staffing arrangement or worksite assignment alone does not establish that the client organization is responsible for the return. The employment relationship and applicable reporting arrangement matter.
When a staffing partner or another payroll provider handles payroll responsibilities, the organizations involved should understand how wage reporting and tax filings are allocated. This is especially useful when workers support multiple locations or a third party files an aggregate return. The IRS instructions provide rules for certain third-party and aggregate filers. Organizations should confirm who is responsible for filing rather than assuming that the entity directing day-to-day work must submit the return.
Accurate payroll information supports this review. A payroll report can show wages and tax details, but it does not determine who has the filing obligation. The parties should align their records and responsibilities with the applicable employment and reporting rules.
What Records and Corrections May Be Needed?
Employers should retain payroll records that support the wages reported and the tax calculation. Useful documentation includes wage detail by employee, state unemployment contribution records, and proof of federal deposits. These records help reconcile the return and explain why payments were excluded or credits were claimed. A payroll system may help organize the information, but the employer must verify that the return follows the applicable tax rules.
If an employer discovers an error after filing, it should follow the IRS procedure that applies to the specific correction. The required steps may differ based on what was incorrect and whether the change affects tax due. Employers should consult the instructions for the relevant tax year and retain documentation supporting the correction.
Federal filing rules do not replace state unemployment reporting obligations. State requirements are governed separately and may involve their own filings and deadlines. Employers should keep federal and state records distinct enough to support each return while ensuring the reported wage information reconciles across systems.
