As a small business owner, you’ve got a lot on your plate. And the turn of the calendar brings yet another towering obstacle: tax season. Without the proper knowledge and preparation, filing taxes may feel like you’re juggling flaming torches while riding a unicycle across a tightrope (shout out to the high-top performers who can actually pull this stunt off!). However, when adequately educated and poised, filing taxes is just another administrative task. 

Sure, taxes might not be your favorite part of running a business, but they’re a necessary evil — and Form 940 is yet another villain in the cast that can’t be ignored.

Form 940 serves as more than a tax form – it’s your business’s contribution to helping workers get back on their feet during tough times. However, the docket doesn’t come with a guide directing taxpayers on how to file Form 940. And, its arrival doesn’t bring streamers and balloons, as no one starts a business dreaming about Federal Unemployment Tax Act (FUTA) tax calculations.

In this FUTA tax filing guide, we’ll break down everything you need to know about Form 940 — what it is, why it matters, and how the right tools can transform tax season into just another task on your to-do list (instead of the stuff of nightmares). Let’s make taxes manageable, together.

What Is Form 940?

Form 940, officially known as the Employer’s Annual Federal Unemployment Tax Return, is more than just another piece of paperwork — it’s a key part of how businesses contribute to the safety net for unemployed workers. FUTA taxes, combined with state unemployment tax systems, provide the funding for unemployment benefits, offering financial support to individuals who find themselves between jobs. If you’ve ever heard someone say, “I’m collecting unemployment,” this form plays a part in making that possible.

Unlike many taxes, FUTA is paid entirely by employers — it’s not deducted from employees’ paychecks. That means Form 940 is your responsibility as an employer, ensuring that you’ve properly calculated and reported what you owe based on the wages you’ve paid throughout the year. While the form itself may seem straightforward, the accompanying instructions can lead you into a maze of rules, calculations, and exemptions, making accuracy essential.

While most businesses with employees need to file Form 940 and pay FUTA taxes, not all employers are required to do so. The IRS outlines clear guidelines that determine whether you’re on the hook for these responsibilities based on the wages you’ve paid and the number of employees you have.

Generally, your business must file Form 940 if it meets one of these criteria:

• It paid $1,500 or more in wages to an employee during any calendar quarter.
• It employed at least one worker for any part of a day in 20 or more weeks throughout the year (these weeks don’t need to be consecutive).

Even if the business didn’t pay employees in a given year but typically has staff, it’s still required to file Form 940, indicating no employee payments were made.

If your business doesn’t meet these thresholds, you may not need to file Form 940. Also, some businesses, such as tax-exempt organizations, government entities, and Indian tribal governments that participate in their state’s unemployment system, are exempt from FUTA taxes and do not need to file.

It’s also important to note that if you’re only working with independent contractors (who receive 1099-NEC forms), you don’t owe FUTA taxes, but you may still have filing obligations in other areas.

Understanding FUTA Taxes

FUTA is a federal law that requires employers to pay a tax based on their employees' wages. The revenue from FUTA taxes helps fund unemployment benefits for workers who lose their jobs, providing them with financial support as they search for new employment. Unlike other payroll taxes, FUTA is paid entirely by the employer, not the employee.

FUTA taxes are levied on the first $7,000 of wages paid to each employee annually. This wage base means that even if an employee earns more than $7,000 in a year, FUTA taxes only apply to the first $7,000. The standard FUTA tax rate is 6%, which means the maximum tax you would owe for each employee would be $420 ($7,000 x 0.06) per year.

However, many employers benefit from a tax credit of up to 5.4% if they fully pay their state unemployment taxes on time. This reduces the effective FUTA rate to just 0.6%, lowering the amount the company would owe for each employee to only $42 ($7,000 x 0.006).

It’s important to note that FUTA taxes are not deducted from employees' wages. Instead, employers use each employee’s wages to calculate the amount of FUTA tax they owe. Once the tax has been calculated, the company is responsible for both depositing the funds and reporting them.

How to Complete Form 940

Filling out Form 940 may seem daunting at first, but by carefully reviewing the process, line by line, the process can be easily navigated. Here's a breakdown to guide you through each section and ensure you stay on track.

Step 1. Start with Employer Information

At the top of Form 940, you'll need to provide basic details about your business. This includes your: 

• Employer identification number (EIN);
• Business name;
• and address. 

If you're using a “doing business as (DBA)” name, make sure to include that too. Don't forget: your EIN is a must — do not use a Social Security number (SSN) or taxpayer identification number (TIN).

Step 2. Report State Unemployment Details

Part 1 of the form asks you about your state unemployment taxes:

• Line 1a: Enter the state abbreviation if you only paid state unemployment taxes in one state.
• Line 1b: If your business operates in multiple states, check the box to indicate that.
• Line 2: Check this box if you paid wages in a state with a FUTA credit reduction. States that have not repaid federal loans for unemployment benefits are subject to a reduction in the FUTA tax credit, so your business will owe the full 6% tax rate. If you check any of these boxes, you’ll need to complete Schedule A (Form 940) to report this information.

Step 3. Determine Your Pre-Adjustment FUTA Tax

Part 2 is all about calculating your pre-adjustment FUTA tax. Here's what you'll need to do:

• Line 3: Enter the total wages paid to employees, including tips, fringe benefits, and other compensations subject to FUTA.
• Line 4: Report any payments exempt from FUTA, like group-term life insurance or certain fringe benefits.
• Line 5: If any employee’s wages exceed $7,000, report the excess here.
• Line 6: Add Lines 4 and 5.
• Line 7: Subtract Line 6 from Line 3 to determine your total taxable FUTA wages.
• Line 8: Multiply the amount on Line 7 by 0.006 to calculate your pre-adjustment FUTA tax.

Step 4. Make Adjustments to Your FUTA Tax

In Part 3, you’ll adjust your tax amount based on the state's unemployment rules.

• Line 9: If all of your FUTA wages are exempt from state unemployment taxes, multiply the amount on Line 7 by 0.054 (the FUTA credit) and enter that amount.
• Line 10: If only some of the wages are exempt or you paid state unemployment taxes late, use the worksheet provided in the instructions to calculate this amount.
• Line 11: If your state has a FUTA credit reduction, report the amount from Schedule A here.
  
  

Step 5. Calculate Your FUTA Tax Balance

Part 4 helps you calculate the final FUTA tax balance.

• Line 12: Add the amounts from Lines 8, 9, 10, and 11. This is your total FUTA tax before any payments or adjustments.
• Line 13: Report any FUTA tax payments you've already made for the year.
• Line 14: If Line 12 is greater than Line 13, enter the difference. This is what you owe. If it’s over $500, you’ll need to deposit the tax.
• Line 15: If you’ve overpaid, report the excess amount here. You can choose to apply the overpayment to the next year or request a refund.

Step 6. Report Quarterly FUTA Liabilities

If your FUTA tax liability is more than $500, Part 5 requires you to report your quarterly FUTA tax liabilities. Enter the total amount you owe for each quarter on Lines 16a to 16d.

Step 7. Designate a Contact for IRS Communication

In Part 6, you can designate someone — whether an employee or tax professional — to speak with the IRS on your behalf. If you check “Yes,” provide that individual's name, phone number, and personal identification number (PIN) to authorize that individual.

Step 8. Sign and Submit

Finally, in Part 7, sign and date the form, providing your name, title, and daytime phone number. If a paid preparer completed the form for you, that individual will need to fill out this section as well.

How to File Form 940

Businesses must file Form 940 on time to avoid penalties. But don’t worry, it’s pretty straightforward. Here’s how it’s done. 

1. Know the Deadline

Form 940 is due by Jan. 31 each year. While this year it does not, if Jan. 31 falls on a weekend or holiday, the due date extends to the next business day. For example, the 2024 Form 940 is due on Jan. 31, 2025, unless you’ve made your FUTA tax deposits on time, in which case you have until Feb. 10 to file.

2. Choose Your Filing Method

You have two options for submitting your Form 940:

• E-File: The IRS prefers electronic submissions. You can e-file directly with the IRS or through an IRS-approved third-party provider, which may charge a fee. If you’re using a CPA or tax preparer, be aware that the entity may need to e-file your Form 940 if they file more than 10 returns during the tax season.
• Mail: If you prefer to submit a paper return, you can mail your completed form to the IRS. The mailing address will vary depending on your location and whether you’re including a payment with your submission. You can find the correct address in the IRS’s Form 940 Instructions.

3. File By the Due Date to Avoid Penalties

While the general due date is Jan. 31, you have until Feb. 10 to file without penalties as long as you’ve made all required FUTA tax deposits on time. If you miss the deadline, the IRS may assess penalties for late filing or payments, so it’s important to stay on top of these deadlines.

4. Payments to the IRS

If you owe $500 or less in FUTA taxes, you can make your payment when you file your Form 940. However, if you owe more than $500, you must make quarterly payments throughout the year to avoid penalties.

For businesses with smaller liabilities (less than $500 per quarter), the IRS allows you to carry over the unpaid amount to future quarters until it adds up to $500 or more. For more complex tax obligations, it may be helpful to work with a payroll provider to ensure everything is handled accurately and on time.

5. Keep Your Information Updated

The IRS mailing addresses for Form 940 submissions can change from year to year, so it’s important to check the most recent Form 940 Instructions before mailing your form to ensure it goes to the correct office.

Efficiently Manage Your Workforce with the Proper Software

Navigating tax season doesn’t have to feel like a circus act. By understanding Form 940 and the associated responsibilities, you can stay ahead of the game and avoid unnecessary stress. While taxes may not be the most thrilling part of your business journey, they’re an essential task that when managed well can be much simpler than they first appear.

To help make your tax season even smoother, consider leveraging workforce management tools, like OnTheClock. Our time tracking, scheduling, and payroll solutions are designed to keep your employee data organized, streamline your payroll processes, and reduce the headaches that come with tax filing. Whether it’s simplifying your employee hours, calculating wages, or ensuring on-time tax deposits, OnTheClock’s solutions can make managing your business’s taxes a lot less overwhelming.

We’ve assembled several resources to help you along the way, including this article: “From Deadlines to Deductions: A Payroll Tax Survival Manual,” which is designed to help you overcome the difficulties of tax season. Give it a look!

Don’t wait for tax season to sneak up on you — take control today and make tax filing just another item on your to-do list. Stay on top of looming deadlines to stay compliant, reduce administrative workload, and keep your business running smoothly all year long!