IRS Form 940: the complete guide for business owners (2025)

Managing payroll is a major responsibility for any business owner who has employees. Beyond simply paying your team, it involves navigating a landscape of federal and state payroll tax requirements. One of the key documents in this process is IRS Form 940, the Employer's Annual Federal Unemployment (FUTA) Tax Return. Understanding this form is essential for staying compliant and avoiding costly penalties.

This guide will walk you through everything you need to know about Form 940 for the 2025 tax year. We'll cover what it is, who needs to file it, how to calculate the tax, and tips for making the process smoother. With the right information, you can handle your FUTA tax obligations with confidence.

What is Form 940?

If you are an employer, Form 940 is a part of your annual tax responsibilities. It's the IRS form you use to report and pay your Federal Unemployment Tax Act (FUTA) tax. This tax provides a financial safety net for workers who have lost their jobs, supporting them as they search for new employment.

Here's what you need to know about Form 940:

• It's an employer-only tax: Unlike Social Security and Medicare taxes, which are shared with employees, the FUTA tax is paid entirely by you.
• It funds unemployment benefits: The money collected through FUTA tax helps fund unemployment benefits for workers.
• It has a specific wage base: The tax applies to the first $7,000 you pay each employee during the calendar year.
• The tax rate can be reduced: The standard FUTA tax rate is 6.0%, but you can often receive a credit that lowers this rate significantly.

Difference between Form 940 and other payroll tax forms

It's easy to confuse Form 940 with other payroll tax forms, most notably Form 941. While Forms 940 and 941 are both essential for employer tax reporting, they serve different purposes.

• Form 940 (Annual): This form is filed once a year to report and pay your FUTA tax. This tax is an employer-only contribution.
• Form 941 (Quarterly): IRS Form 941 is filed every quarter to report federal income taxes, Social Security taxes, and Medicare taxes that you withheld from your employees' paychecks. It also includes your share of Social Security and Medicare taxes. Think of it as the form for the taxes shared by you and your employees.

In short, Form 940 deals with federal unemployment taxes and is filed annually, while Form 941 handles income and FICA taxes (Social Security and Medicare) and is filed quarterly.

The purpose of Form 940

The primary purpose of the FUTA tax reported on Form 940 is to fund the federal government's share of unemployment insurance (UI) programs. These employer-paid taxes ensure that unemployment benefits remain available and that state programs can operate efficiently. The funds collected through FUTA are used to:

• Pay the administrative costs of state unemployment programs.
• Provide loans to states during periods of high unemployment when their own reserves run low.
• Cover half the cost of extended unemployment benefits offered during economic downturns.

How Form 940 benefits employees and the state

When an employee loses their job through no fault of their own, they can apply for unemployment benefits from their state's workforce agency. These weekly payments help them cover living expenses while they search for a new job. The FUTA tax system provides the financial backbone for these state programs.

Without the federal support funded by FUTA taxes, state unemployment systems would be far more vulnerable, especially during recessions when the number of claims rises sharply. Your contributions ensure that this critical safety net is available for workers in your state and across the country when they need it most.

Protect your business with FUTA compliance

Filing Form 940 correctly and on time keeps you compliant while protecting your business, reinforcing your credibility, and supporting the unemployment system that helps millions of workers. Staying current with your FUTA taxes allows you to:

• Avoid unnecessary costs: Late filings or underpayments can trigger steep IRS fines and interest that cut into your bottom line.
• Build trust and credibility: Accurate, on-time filing shows your commitment to responsible business practices—something both your employees and government agencies notice.
• Support a stronger system: Your FUTA contributions help sustain unemployment benefits nationwide, creating a more stable economy for businesses and workers alike.

Who needs to file Form 940

Most employers are required to file Form 940. The IRS sets clear rules to determine if you need to file Form 940. Below, we break down the thresholds so you can understand your obligations for 2025.

Employers with paid wages above $1,500 in any quarter

The most common rule is that you must file Form 940 if you paid wages of $1,500 or more to employees in any single calendar quarter during the current or previous year. The term "wages" includes all compensation, such as salaries, commissions, bonuses, and the value of certain benefits.

Once you meet this $1,500 threshold in any quarter, you are responsible for filing Form 940 for that entire calendar year, even if you don't meet the threshold in other quarters.

Special rules for household employees and agricultural workers

The rules are different for employers of household employees (like nannies or housekeepers) and agricultural workers.

• Household employers: You must file Form 940 if you paid total cash wages of $1,000 or more to your household employee(s) in any calendar quarter of the current or previous year. This tax is reported on Schedule H (Form 1040), Household Employment Taxes.
• Agricultural employers: You have a FUTA filing requirement if you paid cash wages of $20,000 or more to farmworkers during any calendar quarter, or if you employed 10 or more farmworkers for at least some part of a day during 20 or more different weeks.

Exceptions for certain types of employers

Not all employers are subject to FUTA tax. Certain organizations are exempt from this requirement. These typically include:

• 501(c)(3) organizations: Non-profit organizations that are tax-exempt under section 501(c)(3) of the Internal Revenue Code are not subject to FUTA tax.
• State and local governments: Government entities are also exempt from FUTA.
• Indian Tribal Governments: Federally recognized tribal governments are generally exempt.

If your business falls into one of these categories, you likely do not need to file Form 940. However, it's always best to confirm your status with the IRS or a tax professional.

Understanding IRS Form 940 requirements

Once you've determined you need to file, the next step is to understand the specific requirements for reporting and calculating the tax. This includes knowing how often to report, how to figure out what you owe, and what credits you might be eligible for.

Annual vs. quarterly reporting obligations

While Form 940 is filed annually, your tax payments may be due more frequently. FUTA tax liability is calculated quarterly. If your FUTA tax liability is more than $500 for a quarter, you must deposit the tax by the last day of the month following the end of the quarter.

• Q1 (Jan-Mar): Deposit due April 30
• Q2 (Apr-Jun): Deposit due July 31
• Q3 (Jul-Sep): Deposit due October 31
• Q4 (Oct-Dec): Payment due with your Form 940 on January 31

If your liability for any quarter is $500 or less, you can carry it over to the next quarter. You continue to do this until your cumulative liability exceeds $500, at which point a deposit is required. Your total FUTA tax liability for the year is then reported on your annual Form 940.

How to calculate FUTA tax

Calculating your Federal Unemployment Tax is fairly straightforward. For 2025, the tax applies only to the first $7,000 of wages you pay to each employee during the calendar year—this is called the FUTA wage base.

The standard FUTA tax rate is 6.0%. If an employee earns at least $7,000 in the year, the maximum FUTA tax before any credits would be:

$7,000 (wage base) × 6.0% (tax rate) = $420

However, most employers don't pay the full 6.0% because they qualify for a credit for paying state unemployment taxes (SUTA) on time.

Tax credits and reductions

The IRS offers a significant tax credit to employers who pay their state unemployment tax (SUTA) on time and in full. This credit can be up to 5.4% of FUTA taxable wages.

When you receive the maximum credit, your effective FUTA tax rate drops from 6.0% to just 0.6%.

• Standard FUTA rate: 6.0%
• Maximum SUTA credit: 5.4%
• Effective FUTA rate: 0.6%

With the reduced rate, the FUTA tax you owe per employee earning at least $7,000 becomes:

$7,000 (wage base) x 0.006 (effective rate) = $42 per employee per year.

Credit reduction states

In some cases, states may take loans from the federal government to cover their unemployment benefit obligations. If a state has an outstanding loan balance for two or more consecutive years, it becomes a "credit reduction state." Employers in these states will see their FUTA tax credit reduced, resulting in a higher effective FUTA tax rate. 

The Department of Labor announces any credit reduction states each November. It's important to check the Department of Labor list of FUTA credit reduction states for 2025 to ensure you are calculating your tax correctly.

Common mistakes to avoid with IRS Form 940

Errors on Form 940 can lead to processing delays, notices from the IRS, and potential penalties. But don't worry, you can easily avoid these pitfalls. Here are some common mistakes to watch out for, along with how to sidestep them and ensure correct filing:

Using the wrong tax rate

As mentioned above, sometimes a state might have outstanding loan balances, leading to what's called a "credit reduction." This can increase your effective FUTA tax rate. If you miss this adjustment, you could underpay your taxes, leading to issues. Stay informed and check for any credit reduction states each November to ensure your calculations are accurate and you're paying exactly what's required for your state.

Incorrectly calculating taxable wages

A frequent error is forgetting to cap wages. The FUTA tax only applies to the first $7,000 in wages paid to each employee during the calendar year. Accidentally counting wages beyond this threshold for any employee can lead to an overpayment and unnecessary complications. Make sure to track each employee's wages carefully and apply this cap correctly.

Math errors

It sounds simple, but basic addition or subtraction mistakes can throw off your entire return and create discrepancies. Even small numerical errors can trigger IRS scrutiny and delays. Double-checking your math, or better yet, utilizing reliable payroll software, can save you a lot of hassle and ensure your figures are always precise.

Missing deposit deadlines

If your total FUTA tax liability exceeds $500 in a calendar quarter, you're required to make quarterly deposits. Missing these deadlines can result in penalties. Staying on top of these payment schedules is crucial for compliance. Setting reminders or using automated payroll systems can help you manage these deposits effortlessly, so you stay in compliance.

Filing for a closed business

If your business closes, your Form 940 responsibilities don't end immediately. You must file a final Form 940 and clearly indicate that it is your final return. Failing to do so can leave the IRS thinking your business is still active, potentially leading to further tax obligations or notices. It's an important final step to ensure everything is properly closed out.

How to fill out Form 940

To complete Form 940 correctly, follow the steps below and be sure you have the current form for the tax year you're filing.

1. Enter Business Information

Start with your business details to identify your company and where you pay unemployment taxes.

• List your Employer Identification Number (EIN), business name, and address.
• Check the box for each state where you paid unemployment tax.
• If you paid in more than one state, attach Schedule A (Form 940).

2. Calculate Your FUTA Tax

Next, determine how much of your payroll is subject to FUTA tax.

• Enter the total payments made to all employees.
• Subtract FUTA-exempt payments (e.g., fringe benefits, retirement contributions).
• Subtract amounts over $7,000 per employee to find taxable wages.
• Multiply taxable wages by 0.006 (0.6%) to get your FUTA tax before adjustments.

3. Apply Adjustments (If Needed)

If your business is in a credit reduction state, you'll owe additional FUTA tax.

• Check the IRS list of affected states.
• Use Schedule A (Form 940) or IRS instructions to calculate and report the extra amount.

4. Determine Final Tax Owed or Overpaid

Use this section to reconcile your total FUTA tax with deposits made.

• Add your base FUTA tax and any adjustments.
• Subtract deposits made throughout the year.
• The result shows what you owe or have overpaid.

5. Report Quarterly FUTA Liability

This section ensures your quarterly payments match your annual total.

• Record FUTA liability for each quarter (Q1–Q4).
• Verify that your quarterly totals equal your annual FUTA tax.

6. Sign and Authorize a Third Party (Optional)

Finish the form by signing and choosing whether to authorize someone to communicate with the IRS.

• Complete the Third Party Designee section if needed.
• Sign, date, and print your name and title before submitting.

Reporting wages subject to FUTA

When completing Form 940, you must correctly identify which payments are considered wages. Generally, this includes salaries, hourly pay, bonuses, and commissions. However, some types of payments are exempt, such as:

• Health and life insurance benefits
• Contributions to retirement plans like a 401(k)
• Wages paid to certain family members (depending on the business structure)

Carefully review IRS Publication 15 for a complete list of taxable and exempt wages.

Claiming credits for state unemployment tax

To claim the full 5.4% credit, you must have paid all your state unemployment taxes on time. If you paid them late, you may only be able to claim a portion of the credit. Form 940 provides instructions for calculating your credit based on whether your SUTA payments were made timely.

Filing deadlines and payment instructions

Meeting deadlines is non-negotiable when it comes to tax compliance. Missing a deadline for filing Form 940 or making payments can result in immediate penalties.

Standard deadlines and extensions

Form 940 for the 2025 tax year is due by January 31, 2026.

However, if you have made all your quarterly FUTA tax deposits on time and in full, you get an automatic extension to file the form until February 10, 2026. This gives you a little extra time to prepare the annual return. Note that there are no extensions for making your quarterly tax deposits.

How to pay FUTA taxes (electronic and paper options)

FUTA tax deposits must be made electronically using the Electronic Federal Tax Payment System (EFTPS). The IRS requires electronic payments for all federal business taxes. You cannot mail a check for your quarterly deposits.

If you have a balance due when you file your Form 940, and it's under $500, you can pay it with your return. You can pay online via EFTPS, debit/credit card, or through your tax preparer. While mailing a check with Form 940-V, Payment Voucher, is an option, electronic payment is strongly recommended for speed and accuracy.

Consequences of late filing or underpayment

It's very important to file accurately and on time since the penalties for non-compliance can be steep.

• Failure to file: The penalty is 5% of the unpaid tax for each month or part of a month that the return is late, up to a maximum of 25%.
• Failure to pay: The penalty is 0.5% of the unpaid tax for each month or part of a month the tax remains unpaid, up to 25%.
• Failure to deposit: A penalty of 2% to 15% of the underpayment can apply, depending on how late the deposit is.

Interest is also charged on any unpaid tax from the due date until the tax is paid in full. These charges can add up quickly, making it essential to stay on top of your FUTA obligations.

What if I have multiple businesses?

If you operate multiple businesses and they are separate legal entities (e.g., two different LLCs), you must file a separate Form 940 for each business using its unique EIN. You cannot combine the payroll from different businesses onto a single form.

How to amend a Form 940

If you discover an error on a previously filed Form 940, you should correct it by filing an amended return. To do this, you will use the same Form 940 for the year you are correcting. Check the "amended return" box at the top right of the form and fill it out with the corrected information. You should also attach a detailed explanation of the changes you made.

Tips to stay compliant year-round

Managing FUTA tax is an ongoing part of responsible payroll management. Staying organized throughout the year helps make filing faster, easier, and more accurate.

Follow good practices

Good payroll management forms the foundation of FUTA compliance. A few smart habits can save time and prevent year-end surprises.

• Keep accurate records: Maintain detailed payroll records for every employee, including total wages paid and payment dates.
• Track wage thresholds: Watch when each employee's wages reach the $7,000 FUTA wage base—after that, you won't owe FUTA tax for that employee for the remainder of the year.
• Set calendar reminders: Mark your quarterly deposit due dates and the annual Form 940 filing deadline to avoid last-minute rushes or missed payments.

Use payroll software to simplify FUTA reporting

Take advantage of today's sophisticated payroll software, which can handle much of the heavy lifting when it comes to FUTA compliance.

• Automate calculations: Tools like QuickBooks Payroll automatically calculate FUTA tax during each payroll run and stop once an employee reaches the $7,000 limit.
• Handle deposits and forms: Many systems also submit your quarterly deposits and complete Form 940 for you at year-end.
• Reduce risk of errors: Automation helps eliminate manual mistakes and ensures every deadline is met.
• Gain extra assurance: Some services even include tax penalty protection, giving you added peace of mind if something slips through the cracks.

Make Form 940 filing easier for your business

Managing FUTA tax is part of running a responsible business, but it doesn't have to take up all your time. Once you understand how Form 940 works, the right tools and support can make filing more straightforward and accurate.

QuickBooks Payroll simplifies Form 940 filing by automatically calculating FUTA tax, tracking wage limits, and preparing the form for you. Pair it with an accountant's insight for added confidence and accuracy. QuickBooks payroll software handles the numbers, while your accountant ensures everything aligns with IRS compliance and your business goals.