Form 940: How to File the Annual FUTA Tax Return

The first Form 940 I filed took forty minutes and I still got it wrong. Not the arithmetic. I put taxable wages on line 3 instead of total payments, so the figure the rest of the page subtracts from had already been reduced once. The tax came to $294. The correspondence took three months.

That is the strange thing about this return. It is the smallest employment tax filing most employers make, it happens once a year, it fits on one page, and the balance is usually a few hundred dollars. Which is exactly why it generates notices out of all proportion to its size.

This is the filing guide rather than the tax guide: who gets pulled in, when it is due, why depositing and filing are separate obligations, what each part of the return asks for, and how to fix one you already sent. I build the people and records side at FirstHR, an onboarding platform rather than a payroll provider. General information, not tax or legal advice.

What Form 940 Is

Form 940 is the employer’s annual federal unemployment tax return. One return covers your whole calendar year and everyone you paid during it, and unlike the rest of your payroll calendar, it happens once.

Three things it is not. It is not a return of anything withheld from employees, because federal unemployment tax is an employer cost start to finish. It is not your state unemployment filing, which goes to a different agency on a different schedule. And it is not Form 941, which reports withheld income tax and both halves of Social Security and Medicare quarterly.

The scale gap makes this one easy to neglect. A small employer might report tens of thousands on a quarterly return and a few hundred for the entire year on this one. The filing rules are identical, and so are the notices. Both belong on one compliance calendar.

Who Has to File It

You file for a calendar year if you meet either of two tests. You paid $1,500 or more in wages in any calendar quarter of that year or the one before it, or you had at least one employee for some part of a day in 20 or more different weeks across either year.

The duration test is the one small employers miss, because it counts weeks rather than money. The 20 weeks need not be consecutive and need not involve the same person, and a single hour on a single day makes that week count. A thin seasonal schedule can qualify on its own.

The two-year window matters as much as the thresholds. Each test looks at the current year and the one before it, so crossing a line once keeps you filing the following year too, even if you paid nobody at all. That is where most zero-dollar returns come from.

Liability attaches at entity level and follows your federal identification number, so everyone paid under it counts. Nonprofits sit outside this federal tax but almost always inside their state system.

The Deadline, and the Days You Can Earn Back

Form 940 is due January 31 for the calendar year that just closed. If you deposited all of your federal unemployment tax when it was due, in full and on schedule, you may file by February 10 instead.

That extension is automatic. No request, no separate form, nothing to write on the return to claim it. It is granted on your deposit record alone, which makes it the rare tax rule that rewards behavior rather than paperwork (Internal Revenue Service, Topic 759).

Two qualifications matter. It extends filing only, so it moves no money and forgives nothing that was already late. And an employer whose liability stayed under the deposit threshold all year has no deposit record to earn it with. Either date rolls to the next business day when it lands on a weekend or holiday.

January is also the month everything else arrives: the fourth-quarter employment tax return, the wage statements, the contractor forms. Sequencing matters more than speed.

Depositing Is Not Filing

Depositing federal unemployment tax and filing Form 940 are two obligations with two deadlines and two separate penalty regimes. You deposit during the year, quarterly, by electronic funds transfer. You file once, after the year has ended.

The deposit rule works on a running total rather than on each quarter alone. At the end of any calendar quarter, if cumulative undeposited tax exceeds $500, you deposit the whole accumulated amount by the last day of the following month. At $500 or less, nothing is due and it carries forward.

Two consequences follow. An employer whose year total never passes $500, which means about $83,000 of taxable federal unemployment wages across the year, makes no deposits and settles everything with the return. An employer who grows past that line mid-year gets no warning letter. The obligation simply begins.

The Return, Part by Part

The return has seven parts on one page, and only two of them involve arithmetic. Parts 1 through 4 build the number, Part 5 splits it into quarters, and Parts 6 and 7 handle authorization and signature.

Start above Part 1, in the type of return block. Four checkboxes: amended, successor employer, no payments to employees, and final return. Each changes how the rest of the page reads, and the final return box is what stops the IRS expecting filings from a business that has closed.

Part 2 is where the number is built, and the order is not optional. Each line feeds the next, and getting the sequence wrong produces a plausible figure that fails the moment anyone checks it against your registers.

Line 9 is the all-or-nothing case where no wages carried state coverage, and the instructions are explicit that when it applies, lines 10 and 11 do not. Line 10 is the partial case, and the only place the return sends you off the page to a separate worksheet (IRS Instructions for Form 940). Filling line 9 alongside either of the others triggers a recalculation.

Part 5 gets skipped by filers who should not skip it. It is required whenever line 12 exceeds $500, and it asks for the liability incurred in each quarter, not the deposits you made. Line 17 has to equal line 12 to the dollar, and that match is checked automatically.

Exempt Payments and the Wages Above the Base

Line 3 is everything you paid. Lines 4 and 5 are the two subtractions that turn it into taxable wages, and they have to run in that order: exempt payments come out first, and the excess above the wage base is then measured on what is left.

Line 4 carries five category boxes rather than one total. Fringe benefits covers employer-paid accident and health coverage and section 125 amounts. Group-term life sits alone. Retirement and pension covers the employer contribution, which is the distinction people reverse: an employee’s own elective deferral is still a taxable wage here.

Dependent care comes out within the statutory limits. The last box, other, catches the remainder, including certain family members in unincorporated businesses and workers on agricultural visas.

Line 5 is where sequencing bites. It asks for payments made to each employee in excess of $7,000, and the phrase to hold on to is each employee. Calculate it person by person, after line 4 has already been removed from that person’s figure, then sum the results. Reverse the order and the tax comes out low.

Schedule A, Multi-State Wages, and Credit Reduction

Schedule A attaches in two situations: you were required to pay state unemployment tax to more than one state, or you paid wages in a state whose federal credit was reduced. Either one on its own is enough, and the second can apply to a single-state employer.

Completing it is mechanical. Identify every state where you owed state unemployment contributions during the year. For any reduced-credit jurisdiction, enter the federal taxable wages attributable to it and multiply by the published reduction rate. The totals carry to line 11, where they increase what you owe.

The retroactivity is what damages cash planning. A reduction is a property of the whole tax year, and the Department of Labor does not settle the final list until after November 10 of that year (Employment and Training Administration). It then applies to every dollar you paid in that state across twelve months, all of it treated as incurred in the fourth quarter.

The scale is worth seeing. For the 2025 tax year the Department of Labor confirmed two jurisdictions: California at 1.2 percent and the U.S. Virgin Islands at 4.5 percent. On a fully paid employee that is $84 and $315 on top of the ordinary amount, for people you paid months earlier.

Never assume a rate carries forward. A jurisdiction that repays its federal loan before the November deadline drops off the list entirely, one that does not usually sees the reduction step up again, and a separate add-on tied to benefit costs can raise it further unless a waiver is granted. Read the determination published for the year you are filing, not the figure from the year before.

Two details catch employers with staff outside one state. The reduction follows where the work was performed, not where the company is registered. And the multi-state trigger is independent of the credit reduction one: two clean states still requires the schedule.

Fixing a Return You Already Filed

There is no Form 940-X. You correct a Form 940 by filing another Form 940 for the same year with the amended box checked, every applicable line completed with the corrected figures, and a written explanation attached.

Use the form printed for the year being corrected rather than the current one, because the rates, the reduction list, and the line numbering all belong to that year. Restate the whole return as it should have read, not only the lines that moved. A differences-only return cannot be matched against what is posted to your account.

The explanation is not a formality. It is what keeps the amended figures from reading as a second original return. The IRS accepts an amended Form 940 through its electronic filing system with the explanation attached, and paper is still allowed. A paper amendment goes to the address for filing without a payment, which stays correct even when a payment is enclosed.

That is a real difference from the quarterly return, which has its own dedicated correction form. If an amendment produces an overpayment, line 15 asks whether to apply it forward or refund it. Refund claims are time-limited, generally three years from filing or two from payment, so an old error may no longer be recoverable.

Household, Farm, and Successor Employers

Three groups file differently. Household employers generally report on Schedule H with their personal income tax return instead of Form 940, farm employers file Form 940 under their own thresholds, and successor employers get credit for what the business they acquired already did.

Household employment is the most common and the least understood. Pay $1,000 or more in cash wages in any calendar quarter of the year or the one before it and you are liable, normally reporting through Schedule H attached to your personal return. The exception: if you already file employment tax returns for business employees, you may fold household wages into Form 940 instead.

Farm employers use two thresholds of their own: $20,000 in cash wages to farmworkers in any calendar quarter, or ten or more farmworkers for part of a day in 20 or more different weeks. The unemployment side still runs on Form 940 even though farm withholding and FICA go on a separate annual return.

Successor employers get the checkbox at the top. Acquire substantially all of the property of a trade or business and immediately employ one or more of that predecessor’s people, and you may count wages already paid to them toward the $7,000 base rather than restarting it. Restarting is a quiet way to overpay.

What Late Filing and Late Deposits Cost

Three distinct penalties can attach to one late Form 940, and they are calculated from different bases. Failing to file, failing to pay, and failing to deposit are separate failures with separate rates, and a single episode can produce all three.

The filing penalty runs at 5 percent of unpaid tax for each month or part month the return is late, capped at 25 percent. The payment penalty is half a percent of the unpaid balance per month, also capped at 25. Where both apply in a month, the filing penalty is reduced by the payment penalty. Interest runs on top and is not a penalty at all.

The deposit penalty has its own ladder and does not care whether the return was perfect: 2 percent up to five days late, 5 percent for more than five but not more than fifteen days, 10 percent beyond that, and 15 percent once the amount is still unpaid after a notice and demand (26 U.S.C. 6656).

Two asymmetries are worth holding on to. A late return with nothing owed carries no filing penalty, which makes a zero-balance return feel optional even though its absence keeps the account open. And deposits are penalized separately, so a perfect return on the deadline proves nothing about the money. First-time relief and reasonable cause both exist, and both have to be asked for.

The Errors That Actually Generate Notices

Most Form 940 correspondence traces back to a handful of structural errors, and only one of them is a miscalculation. The rest are entries in the wrong place, a missing attachment, or a box nobody ticked.

The first row is mine, and it is common because it looks right. Every other payroll figure you handle is a taxable figure, so entering one here feels like consistency. The return is built the other way round, starting from everything and subtracting twice.

The last row costs nothing to prevent and is almost never done. A business that winds down without marking a final return stays on the filing roster, and the notices follow the responsible party rather than the dissolved entity. Keep the return, the registers behind line 3, and the deposit confirmations together for four years.

Frequently Asked Questions