Free Guide to Form 940 Filing Instructions

What Form 940 Is and Why Employers File It

Form 940 is the Federal Unemployment Tax Act (FUTA) Annual Return of Employer Federal Unemployment Tax Liability. The IRS requires employers to file this form once each calendar year to report federal unemployment taxes they owe. Think of it as a yearly tax document—similar to how individuals file Form 1040, businesses file Form 940 to settle their unemployment tax obligations with the federal government.

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The FUTA tax helps fund state unemployment insurance programs that pay benefits to workers who lose their jobs through no fault of their own. When you pay FUTA taxes as an employer, that money goes into a federal trust fund. States then borrow from this fund or contribute to it based on their unemployment levels. In 2024, the standard federal unemployment tax rate is 6.0% on the first $7,000 of wages paid to each employee during the calendar year. However, employers who pay state unemployment insurance taxes on time may receive a credit of up to 5.4%, reducing their federal rate to 0.6%.

Not every business files Form 940. The IRS has specific rules about who must file. Generally, you need to file if you paid $1,500 or more in wages during any calendar quarter in the current year or the previous year, or if you had one or more employees for at least some part of a day in any 20 different weeks during the current year or the previous year. Many small businesses and nonprofits may not meet these thresholds and therefore do not file Form 940.

Practical Takeaway: Before spending time on Form 940, confirm whether your business actually needs to file by reviewing the IRS threshold requirements. Calculate your total wages paid in the calendar year to determine if you meet the $1,500 quarterly threshold or the 20-week employee requirement.

Understanding FUTA Tax Rates and Credits

The federal unemployment tax rate structure is complex because it involves both a base rate and credits. The standard FUTA tax rate is 6.0% on the first $7,000 of each employee's wages per calendar year. This means the maximum FUTA tax per employee per year is $420 (6.0% multiplied by $7,000). However, most employers pay a reduced rate because they receive a credit for state unemployment insurance taxes paid.

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The credit system works this way: if you pay your state unemployment insurance taxes on time and in full, you can claim a credit of up to 5.4% against your federal FUTA tax. This credit reduces your effective federal rate from 6.0% to 0.6%. The 5.4% credit is available for all employers who meet the timing requirements, but some states charge higher unemployment insurance rates. If your state's rate exceeds the standard credit allowance, you may still only claim the 5.4% credit on your Form 940, even though you paid more to your state.

There are special situations that affect FUTA tax rates. If you are a successor employer (you took over a business), you may inherit the predecessor's FUTA experience rating, which could result in a lower or higher credit. Additionally, if you employ railroad workers, agricultural workers, or domestic workers, different rules may apply. Certain nonprofit organizations and government entities also have special FUTA tax treatment. Finally, if you fail to pay state unemployment insurance taxes on time, the IRS reduces or eliminates your credit, increasing your federal tax liability.

The FUTA tax wage base is $7,000 per employee per calendar year. This means you only pay FUTA tax on the first $7,000 of each employee's annual wages. If an employee earns $50,000 per year, you calculate FUTA tax on only the first $7,000. This wage base applies per employee, not per employer, so a business with 10 employees has a potential FUTA wage base of $70,000 total.

Practical Takeaway: Track the cumulative wages you pay to each employee throughout the calendar year. Once an employee's wages reach $7,000, stop calculating FUTA tax on their additional earnings for that year. Verify your state's unemployment insurance rate and payment deadline to ensure you receive the full 5.4% credit on your Form 940.

Who Must File Form 940 and Special Employment Situations

The filing requirement for Form 940 depends on wage thresholds and the number of weeks you employed workers. You must file Form 940 if you paid $1,500 or more in wages to employees during any single calendar quarter in either the current year or the prior year. Alternatively, you must file if you had employees who worked for you for at least part of a day in 20 or more different weeks during the current year or the prior year. Most employers use the quarterly wage test because it is straightforward to calculate.

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Certain types of employment are excluded from FUTA tax entirely. If you only employed immediate family members—such as your spouse or children under age 21—those wages are not subject to FUTA tax. Additionally, if your only employees were your parents or your spouse's parents, FUTA tax does not apply. This family employment exemption exists because these situations typically involve family financial arrangements rather than traditional employer-employee relationships.

Agricultural employment has different rules. If you paid $20,000 or more in agricultural wages in any single quarter, or if you employed 10 or more agricultural workers for at least 20 weeks in a year, you must file Form 940 for those agricultural workers. Agricultural wages are calculated the same way as regular wages but are reported separately on Form 940. If you have both regular employees and seasonal agricultural workers, you may need to track and report both categories.

Household employment presents another category with specific rules. If you employ household workers—such as housekeepers, nannies, or caregivers—you have a FUTA filing requirement if you pay $1,500 or more in household wages in any quarter. Many household employers are unaware of this requirement because household employment is often informal. The IRS treats household employment the same as other employment for FUTA purposes.

Nonprofit organizations and government entities have different FUTA treatment. Most nonprofit organizations must pay FUTA tax on their employees' wages at a rate of 6.0% (before credits) unless they elect to be exempt. Government employers typically do not pay FUTA tax because they have their own unemployment systems, but they may be required to report certain information on Form 940. Churches and church-controlled organizations have special exemption provisions available.

Practical Takeaway: List all types of workers your business employed during the calendar year—regular employees, agricultural workers, household employees, and family members—and calculate total wages paid to each category. Cross-check against the $1,500 quarterly threshold and the 20-week requirement to confirm your filing obligation.

Step-by-Step Form 940 Completion Process

Form 940 consists of multiple parts, each requiring specific information. The form begins with the employer's identification information: your legal business name, address, and Employer Identification Number (EIN). If your address has changed since last year, you must update it on this year's Form 940. Your EIN is a nine-digit number issued by the IRS when you established your business; if you do not have an EIN, you cannot file Form 940.

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Part 1 of Form 940 asks you to confirm your filing period and employment tax payment dates. You indicate whether you are filing for the full calendar year or a partial year (which occurs in certain succession situations). You also report whether you have an 8(c) FUTA credit from your state, which is relevant only if you relocated your business or merged with another employer. Most employers indicate no special situation in Part 1.

Part 2 contains the wage calculations. You report your total payroll in Box 1a, which includes all wages paid to all employees, regardless of FUTA tax status. In Box 1b, you enter wages that are exempt from FUTA tax, such as family member wages or agricultural wages paid to workers who do not meet the agricultural employment thresholds. You then calculate taxable wages by subtracting exempt wages from total wages. This figure in Box 2 represents the wages subject to FUTA tax for the year.

Part 3 requires you to calculate your FUTA tax liability. You multiply your taxable wages (from Part 2, Box 2) by your tax rate. Most employers use the 0