What Is Form 940 and How Do Small Businesses Use It?

If your business has employees, you likely need to pay federal unemployment (FUTA) taxes and report them annually to the IRS using Form 940. And if you miscalculate your obligation or miss the reporting deadline, you risk steep penalties. This guide covers everything you need to know about filing Form 940 with confidence, including filing thresholds, deadlines, the FUTA calculation process, and what happens if you miss the deadline.

What Is Form 940 and What Is It Used For?

IRS Form 940 is the annual federal unemployment tax return for employers. It calculates the amount of unemployment tax that must be paid on the federal level according to the Federal Unemployment Tax Act (FUTA). FUTA is a payroll tax imposed only on the employer; no employee payment or withholding is required.

The form consists of two pages listing the total payments to all employees, minus payments exempt from FUTA, such as certain fringe benefits, group term life insurance, and dependent care assistance. If an employer has employees in more than one state and/or is subject to credit reduction, they must also complete Schedule A of Form 940 to calculate the tax.

Each year, businesses that meet the FUTA wage or employee thresholds must file Form 940 and pay tax on the first $7,000 of each employee's wages (including owners of S corporations who receive a salary for work performed for their businesses). While states pay unemployment benefits to former employees through their own programs, FUTA helps fund the administration of those programs and provides loans to states that run short of funds to pay benefits.

Filing Form 940 should also alert you to file a state unemployment tax form. If you have a remote worker, you generally pay this state tax—and file the associated form—in the state where your employee is located and not where your business is based. Multiple remote workers in more than one state means multiple state unemployment tax obligations.

Tax Credits and Credit Reduction

If employers pay their state unemployment taxes in full and on time, they receive a 5.4% credit to calculate their FUTA tax, resulting in a tax rate of 0.6% (6.0% rate - 5.4% credit = 0.6%). If the employer is in a state that took loans from the federal government to meet its state unemployment benefits liabilities and has not repaid those loans within the allowable time frame, the 5.4% credit is reduced. The Department of Labor and Internal Revenue Service announce the states subject to credit reduction in the middle of November.

In the first year a state is subject to credit reduction, the credit drops by 0.3%, raising the effective rate to 0.9% (6.0% rate - [5.4% credit - 0.3% reduction] = 0.9%). The reduction increases each additional year the loan goes unpaid.

What Is the Difference Between Form 940 and Other Employer Tax Returns?

As an employer, it’s important to understand how Form 940 fits into your overall filing obligations and how it is distinct from related employer tax returns. Unlike Form 940, which covers only the employer-paid FUTA tax, the following forms report taxes withheld from employees' wages along with the employer's share of Social Security and Medicare.

• Form 941 (Employer’s Quarterly Federal Tax Return): File this form every quarter to report federal income tax withheld from employees' wages, the employees' share of Social Security and Medicare (FICA) taxes, and the employer's share of FICA.
• Form 943 (Employer's Annual Federal Tax Return for Agricultural Employees): If you paid taxable wages to one or more farm workers, use this form instead of Form 941 to report the amount of federal income tax withheld and FICA taxes (both the employee and employer shares) for those workers.
• Form 944 (Employer's Annual Federal Tax Return): Small employers with an annual tax liability for withheld federal income tax and FICA (employee and employer share) totaling $1,000 or less may file this form instead of Form 941. Employers must receive written notification from the IRS to qualify.

Filing Federal Form 940

Employers must file Form 940 every year they meet the filing requirements, even if no former employees have claimed unemployment benefits. It can be filed electronically or on paper by mail.

What Are the Filing Requirements for Form 940?

Employers must file Form 940 if they meet either of the following conditions in the current or previous calendar year:

• Paid $1,500 or more in wages to employees during any calendar quarter (January through March, April through June, July through September, or October through December).
• Had at least one employee for any part of 20 or more different weeks.

Different rules apply to some employers. Household employers generally report FUTA tax on Schedule H with their personal tax return instead of filing Form 940, and agricultural employers have higher wage and employee thresholds. Certain tax-exempt organizations, such as 501(c)(3) nonprofits, are exempt from FUTA altogether.

If you permanently go out of business or stop paying wages to your employees, you must file a final Form 940 and check the box indicating it's your final return.

When Is Form 940 Due?

The standard due date for Form 940 is January 31. If you paid all FUTA deposits in full and on time, the due date is extended to February 10. In general, due dates that fall on a weekend or holiday are extended to the next business day.

For 2026 tax year returns, January 31, 2027 falls on a Sunday, so the due date is February 1, 2027 (or February 10 if all deposits were made on time).

When Do I Make the Payment?

Even though Form 940 is filed once a year, an employer may have to make quarterly tax deposits if their federal unemployment tax is more than $500 for the quarter. Quarterly deposits must be made by electronic funds transfer. Most employers use EFTPS, a free and secure online federal tax payment program.

The deposit must be made by the last day of the month after the end of the calendar quarter. For example, if an employer’s federal unemployment tax totals $600 based on payroll for January through March, the tax must be deposited by April 30.

If the quarterly liability is $500 or less, it carries over to the next quarter. For example, if the first-quarter liability is $400, it carries over and is added to the second-quarter liability to determine whether a payment is required. In the fourth quarter, if the total (including anything carried over) is $500 or less, the employer can either deposit it or pay it with Form 940 when filing by January 31.

Businesses that pay 11 or fewer employees during the year generally won't exceed the quarterly deposit threshold at the standard 0.6% rate, so they can typically pay the full amount when they file Form 940.

For example, if you have 5 employees who receive compensation in the first quarter of $10,000 (only the first $7,000 counts), $8,000 (only the first $7,000 counts), $6,000, $4,000, and $1,000, respectively, no payment for this quarter is due. This quarter’s tax liability is $150 ($25,000 x .006), which is below the $500 payment deposit threshold.

How Do I File a Federal Form 940?

The IRS strongly encourages e-filing for accuracy and timeliness. To e-file Form 940, you can use IRS-approved software, a tax professional, or a payroll provider. Some software providers charge a fee to file electronically.

If you file the return on paper, it must be sent to the address listed in the instructions on Form 940. The address is based on the employer’s location and whether a payment accompanies the form. The address can change each year, so verify it before mailing.

How to Avoid Penalties for Incorrect Filing and Payment

Staying penalty-free comes down to three things: filing Form 940 on time (and ensuring it’s complete and accurate), making any required deposits on schedule, and making sure those payments go through.

• File Form 940 by the due date. Form 940 is generally due January 31 for the previous calendar year, and filing late can be costly. The failure-to-file penalty is 5% of the unpaid tax for each month (or part of a month) the return is late, up to a maximum of 25%. If you file on time but don't pay the full balance, a separate failure-to-pay penalty of 0.5% per month applies, also capped at 25%.
• Make required deposits on time. If your FUTA liability exceeds $500 in a quarter, the deposit is due by the last day of the month following the end of that quarter. Late deposits trigger a failure-to-deposit penalty that grows the longer the payment is overdue:
  • 1-5 days late: 2% of the unpaid deposit
  • 6-15 days late: 5% of the unpaid deposit
  • More than 15 days late or paid without electronic funds transfer: 10% of the deposit
  • Unpaid more than 10 days after the first IRS notice: 15% of the deposit
• Make sure payments clear. If a payment is returned for insufficient funds or another reason, the IRS charges a dishonored payment penalty of 2% of the payment amount. For payments under $1,250, the penalty is $25 or the amount of the payment, whichever is less.

The IRS also charges interest on unpaid tax and penalties until you pay the balance in full. If you have a legitimate reason for missing a deadline, such as a natural disaster or serious illness, you may be able to request penalty relief for reasonable cause.

Using a payroll tax service can help you calculate, file, and deposit your payroll taxes to avoid penalties.

Form 940 Instructions

Form 940 is simple to complete if you have all the required information.

1. Enter your business name, address, and Employer Identification Number (EIN). If you’re a sole proprietor, enter your name on the "name" line, with your trade name on the "trade name" line. You don’t need to enter anything on the trade name line if the business name and trade name are the same.
2. Indicate the type of return being filed if necessary. This includes checking a box to show if it's an amended return, a return for a successor employer, a return with no tax liability because no wages were paid during the year, or if the business has closed and stopped paying wages (so the IRS won't be looking for an unfiled return in the following year).
3. Calculate the tax. Enter total payments to all employees, reduce this by payments exempt from the tax (such as employer payments of health coverage, employer contributions to qualified retirement plans), and then enter the total payments to each employee over $7,000 to arrive at taxable wages. Multiply this amount by 0.006 to determine the tax before adjustments.
4. Make any required adjustments. These may include wages excluded from state unemployment tax, state unemployment taxes paid late, or credit reduction.
5. Determine the final tax due and whether there's a balance due or an overpayment based on deposits made for the year. If the balance due is more than $500, you must deposit it. If the balance due is $500 or less, you can deposit it or pay it with the return by check, credit or debit card, or electronic fund transfer. If you overpay because you have already deposited too much, you can request a refund or apply the excess amount to the following return.