Form 940 Overview: Everything Employers Need to Know in 2025

Filing taxes is one of the most important responsibilities of running a business, and if you have employees, you're probably already familiar with the various forms required by the IRS. One such form is Form 940, which deals with unemployment taxes. If you're scratching your head wondering what it is, why it matters, and how to file it correctly, this guide is here to make it all crystal clear.

Let’s dive into everything you need to know about Form 940, from its purpose to filing deadlines, and even tips to simplify the process.

What Is Form 940?

Form 940 is an IRS form that businesses use to report their annual Federal Unemployment Tax Act (FUTA) tax. It plays a critical role in funding unemployment compensation for workers who lose their jobs. Here’s a closer look at the key aspects of this form:

Understanding FUTA

The Federal Unemployment Tax Act (FUTA) provides funds for state unemployment agencies to pay unemployment benefits to eligible workers. Employers contribute to this federal tax, and the burden is not passed on to employees.

Purpose of Form 940

The main purpose of Form 940 is to help businesses report and pay their FUTA taxes to the IRS. It ensures businesses comply with federal laws supporting unemployment benefits.

Who Needs to File Form 940?

Form 940 must be filed by employers who meet either of these conditions:

1. They paid wages of $1,500 or more in any calendar quarter in the past two years.
2. They had at least one employee working for at least part of a day in 20 or more weeks during the current or previous year.

Businesses hiring only independent contractors or solely employing household employees might not need to file. However, always verify your eligibility based on your business structure and employment practices.

When to File Form 940

Annual Filing Deadline

Form 940 is an annual filing requirement, and the deadline is January 31st of each year for the previous year’s FUTA taxes. For example, for the tax year 2023, the form is due by January 31, 2024.

Penalty-Free Extensions

You can extend the deadline to February 10 if you’ve deposited all FUTA taxes owed for the year on time. However, missing the January 31 deadline without paying your dues in full could result in penalties.

Late Filing Penalties

If you don’t file Form 940 on time or fail to pay the required taxes, you could face:

• Failure-to-file penalties, usually 5% of the unpaid tax for each month (or part of a month) the return is late, up to a maximum of 25%.
• Failure-to-pay penalties, typically 0.5% of the unpaid tax for each month it remains unpaid.

Clearly, sticking to the filing deadline is critical to avoid additional headaches.

Filing Instructions for Form 940

Here’s the step-by-step breakdown of how to file Form 940 and ensure a smooth process.

Step 1: Gather Necessary Information

Before you start, collect all the required details. This includes:

• Total wages paid to employees during the tax year.
• Amount of FUTA taxable wages (total wages minus exemptions like fringe benefits).
• State unemployment contributions made.
• FUTA tax credits claimed (if applicable).

Step 2: Complete Each Section of the Form

Form 940 has several sections that need your attention. Here’s how to handle them:

1. Business Information

At the top of the form, fill in your:

• Employer Identification Number (EIN).
• Business name and address.

2. Calculate FUTA Tax Liability

This part involves some math:

• Enter the total payments made to employees.
• Subtract exempt payments (e.g., certain fringe benefits, group-term life insurance, etc.).
• Determine FUTA taxable wages (usually $7,000 per employee annually).
• Multiply the taxable wages by 6% (the FUTA tax rate).
• Apply credits for state unemployment contributions.

The final figure here is your FUTA tax liability.

3. Tax Deposits

If your FUTA tax liability exceeds $500 during any quarter, you must make quarterly payments. Use Form 940 to reconcile these deposits with your annual liability.

4. Adjustments

If your state is considered a "credit reduction state" (because it borrowed federal funds for unemployment and hasn’t repaid them), you’ll need to adjust your FUTA tax liability.

5. Total Tax Due

This section sums up everything. If you owe additional taxes, they must be paid when filing the form.

Step 3: Payment of FUTA Taxes

There are two main ways to handle payments:

1. EFTPS (Electronic Federal Tax Payment System): Preferred by the IRS for security and speed.
2. Paper Checks: Mail a check along with a completed payment voucher (Form 940-V) to the IRS.

Step 4: File the Form

Choose your filing method:

• E-file: Convenient and fast, using IRS-approved software or a professional tax preparer.
• Paper Filing: Download the form from the IRS website, complete it, and mail it to the appropriate address (varies by state).

Step 5: Keep Records

After filing, maintain records for at least four years. These should include:

• Copies of Form 940.
• Proof of tax payments.
• Wage records and details of state unemployment tax contributions.

Key Tips for Filing Form 940

Here are some tips to make the process stress-free:

1. Stay Organized

Keep employee payroll records updated throughout the year. It’ll save you hours when it’s time to file.

2. Use Filing Software

Many payroll software options can calculate FUTA taxes automatically and even file Form 940 for you.

3. Set Reminders

Mark key dates in your calendar to avoid missing deadlines.

4. Double-Check Calculations

Errors on Form 940 can lead to penalties. Always review the form before submitting it.

5. Consult a Tax Professional

If you’re unsure about any aspect of Form 940, consult a CPA or tax advisor. It’s better to ask for help than risk costly mistakes.

E-filing vs. Paper Filing

Feature	E-Filing	Paper Filing
Convenience	Quick and easy from anywhere	Requires printing and mailing
Processing Time	Faster, typically within 24-48 hours	Slower due to postal and manual processing
Error Detection	Built-in checks reduce mistakes	Errors are more likely to go unnoticed
Cost	May involve software fees	Minimal cost (postage)
Record-Keeping	Digital records available	Requires manual storage of paper copies

Conclusion

Filing Form 940 might seem daunting at first, but it’s an essential task for every employer. It ensures compliance with federal regulations and supports unemployment benefits that many workers rely on. By understanding the purpose of Form 940, staying organized, and following the steps outlined above, you can make the process straightforward and stress-free.

Remember, timely and accurate filing is the key to avoiding penalties and maintaining a good standing with the IRS. Whether you choose to e-file or mail a paper return, don’t wait until the last minute—start preparing today!

FAQs

When should Form 940 be filed?

Form 940, the Employer's Annual Federal Unemployment (FUTA) Tax Return, is due by January 31st each year, covering the previous calendar year's tax liability. If you've deposited all FUTA taxes on time throughout the year, the IRS grants an extension to file until February 10th. Timely filing is crucial to avoid penalties and ensure compliance with federal tax obligations.

Is FUTA $42 per employee?

The Federal Unemployment Tax Act (FUTA) tax rate is 6% on the first $7,000 of each employee's annual wages, resulting in a maximum of $420 per employee. However, employers who pay state unemployment taxes on time may be eligible for a credit of up to 5.4%, reducing the effective FUTA tax rate to 0.6%. This credit lowers the maximum FUTA tax to $42 per employee annually.

What is Form 941 used for and when must it be filed?

Form 941, the Employer's Quarterly Federal Tax Return, is used to report income taxes, Social Security tax, and Medicare tax withheld from employees' paychecks, as well as the employer's portion of Social Security and Medicare taxes. Employers must file Form 941 quarterly, with due dates on April 30, July 31, October 31, and January 31 for the preceding quarter. Timely filing ensures compliance with federal tax regulations and helps avoid potential penalties.

Where do I file my 940 annual return?

The mailing address for Form 940 depends on your business's location and whether you're including a payment. The IRS provides specific addresses based on these factors. For the most accurate and up-to-date information, refer to the "Where Do You File" section in the Instructions for Form 940 on the IRS website. Alternatively, you can e-file Form 940 using IRS-approved software or through a tax professional, which is often faster and reduces the chance of errors.

Do I need to file 940 Schedule A?

You need to file Schedule A (Form 940) if you paid wages in more than one state or if your state is subject to a credit reduction. Schedule A helps calculate the credit reduction and ensures accurate reporting of your FUTA tax liability. If neither condition applies to your business, you don't need to include Schedule A with your Form 940.