How to File IRS Form 940

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Form 940 reports federal unemployment tax.
Form 940 reports federal unemployment tax. (Image: dolgachov/iStock/Getty Images)

Internal Revenue Service Form 940 is the Employer's Annual Federal Unemployment Tax, or FUTA, return. If you are an employer, you must determine whether to file Form 940, and if so, how much to pay in FUTA taxes. You have to file this form for the previous year in February of the new year by mailing it, with a check, if required, to the IRS.

Obligation to File

The federal and state governments collect unemployment tax to help pay benefits to qualified individuals who have lost their jobs. You must pay FUTA and file Form 940 if you paid wages of at least $1,500 in any quarter of the tax year. Alternatively, the requirement applies if you had one or more full-time, part-time or temporary employees for at least 20 weeks in the tax year. If you bought or sold your business during the tax year, file Form 940 for the portion of the year that you paid employees. Special filing rules apply to household employers, farmers, tribal governments and nonprofit organizations.

Figuring the Tax

As an employer, you -- not the employee -- pay FUTA, which applies to the first $7,000 of salary or wages paid to each employee during the tax year. You should not include FUTA-exempt payments, including fringe benefits, group term life insurance, retirement or pension contributions and dependent care. To figure total FUTA wages, add up all the payments made to all employees during the year, subtract FUTA-exempt payments and subtract total wages in excess of $7,000 for each employee. Multiply the result by 6 percent to find the unadjusted FUTA.

State Credits

If you paid state unemployment tax, subtract it from unadjusted FUTA. Each state has its own unemployment tax rate, and you can receive a FUTA tax credit of up to 5.4 percent because of these state taxes. However, some states have borrowed money from the federal unemployment account and are assessed a credit reduction on state unemployment taxes. The reduction is at least 0.3 percent for each year that the state owes money. For example, suppose a state that assesses a 4 percent unemployment tax has a four-year credit reduction of 1.2 percent (4 x 0.3 percent). The state FUTA credit is therefore reduced from 4 percent to 2.8 percent, which means you must pay adjusted FUTA of 3.2 percent (6 - 2.8 percent) instead of 2 percent (6 - 4 percent) for employees in that state.

Filing the Form

To complete Form 940, enter your employer identification number and other identifying information. Identify the state in which you do business -- or indicate multistate employment if applicable -- and whether the state has a FUTA credit reduction. Next, enter your FUTA data and calculations, and adjust for state credits. Finally, determine if you underpaid FUTA and attach a check if necessary. If you owe FUTA, you must file by the first business day in February, but you have an extra week if your FUTA payments are up to date. The IRS applies late-FUTA-payment penalties that range from 2 percent to hundreds of thousands of dollars and five years' imprisonment.

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