IRS Instruction 940 - IRS Forms, Instructions, Pubs 2026

IRS Instruction 940 – IRS Forms, Instructions, Pubs 2026 – In the world of payroll taxes, understanding and complying with federal requirements is crucial for employers. One key obligation is filing Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return. This form reports your annual FUTA tax, which funds unemployment benefits for workers who lose their jobs. If you’re an employer navigating this process for the 2025 tax year, this comprehensive guide breaks down the IRS instructions for Form 940, including who must file, due dates, step-by-step filing guidance, and recent updates. We’ll help you avoid common pitfalls and ensure compliance to prevent penalties.

What Is IRS Form 940 and Its Purpose?

Form 940 is the official document employers use to calculate and report their annual FUTA tax liability. The FUTA tax, combined with state unemployment taxes, provides compensation to unemployed workers. Unlike other payroll taxes, FUTA is paid solely by employers and isn’t withheld from employee wages. The tax applies to the first $7,000 of wages paid to each employee in a calendar year, after accounting for any exempt payments.

The standard FUTA tax rate is 6.0%, but employers can claim a credit of up to 5.4% for timely state unemployment tax payments, reducing the effective federal rate to 0.6% for most. This credit system encourages participation in state unemployment programs. Exempt payments might include certain fringe benefits, retirement contributions, or group-term life insurance.

Who Must File Form 940?

Not every business needs to file Form 940. You must file if your business meets one of these thresholds for the 2025 tax year:

You paid wages of $1,500 or more to employees in any calendar quarter during 2024 or 2025.
You had one or more employees (full-time, part-time, or temporary) for at least some part of a day in 20 or more different weeks in 2024 or 2025.

Special rules apply to certain employers:

Household employers: File if you paid $1,000 or more in cash wages in any quarter. You can often report this on Schedule H (Form 1040) instead, but may use Form 940 if you also file Forms 941, 943, or 944.
Agricultural employers: Required if you paid $20,000 or more in cash wages to farmworkers in any quarter or employed 10 or more farmworkers for 20 or more weeks. Wages for H-2A visa workers count toward the threshold but are exempt from FUTA tax.
Indian tribal governments, tax-exempt organizations, and state/local governments: Generally exempt, with specific conditions.
Successor employers: If you acquired a business, you may need to include the predecessor’s wages, depending on circumstances.

If you had no employees or payments in 2025, you might still need to file a “no payments” return. For businesses that closed or stopped paying wages, mark it as a final return.

Due Dates and Filing Methods for 2025

For the 2025 tax year, Form 940 is due by February 2, 2026. If you’ve timely deposited all FUTA taxes, you get an extension to February 10, 2026. If the due date falls on a weekend or holiday, it’s the next business day. Postmarked mail or electronic submissions count as timely if sent by the deadline.

The IRS strongly encourages electronic filing for accuracy and speed. Visit IRS.gov/EmploymentEfile to e-file. For paper filing, use the appropriate address based on your location and whether you’re including a payment (e.g., Kansas City, MO for most states without payment). Aggregate filers, such as section 3504 agents or Certified Professional Employer Organizations (CPEOs), must identify their type on the form and attach Schedule R if applicable.

New for 2025: Balance due payments must be made electronically to promote efficiency, per Executive Order 14247. Options include EFTPS, credit/debit card (with fees), or electronic funds withdrawal during e-filing.

Step-by-Step Guide to Completing Form 940

Filling out Form 940 requires careful attention to detail. Use whole dollars (rounding consistently if needed), and enter your Employer Identification Number (EIN), name, and address at the top. Here’s a breakdown by part:

Type of Return

Check boxes if this is an amended return, you’re a successor employer, there were no payments in 2025, or it’s a final return. Aggregate filers must now specify if they’re a section 3504 agent, CPEO, or other third party—a new requirement for 2025.

Part 1: Tell Us About Your Return

Line 1a: Enter the state abbreviation if all wages were subject to one state’s unemployment tax.
Line 1b: Check if you’re a multi-state employer (attach Schedule A).
Line 2: Check if you paid wages in a credit reduction state (attach Schedule A).

Part 2: Determine Your FUTA Tax Before Adjustments

Line 3: Total payments to employees (include salaries, tips, bonuses, etc.).
Line 4: Exempt payments (check applicable boxes like fringe benefits or retirement).
Line 5: Wages over $7,000 per employee.
Line 6: Subtotal of lines 4 and 5.
Line 7: Taxable FUTA wages (line 3 minus line 6).
Line 8: FUTA tax (line 7 × 0.006).

Part 3: Determine Your Adjustments

Line 9: If all wages were excluded from state tax, multiply line 7 by 0.054.
Line 10: For partial exclusions or late state payments, use the worksheet to calculate adjustments.
Line 11: Enter credit reduction from Schedule A.

Part 4: Determine Your FUTA Tax and Balance Due or Overpayment

Line 12: Total tax after adjustments.
Line 13: Deposits made.
Line 14: Balance due (pay electronically if over $500).
Line 15: Overpayment—choose refund (now via direct deposit) or apply to next return.

New for 2025: Refunds can be directly deposited for faster, secure processing.

Part 5: Report FUTA Tax Liability by Quarter (If Line 12 > $500)

Break down your quarterly liabilities. The fourth quarter is calculated as total minus the first three.

Parts 6 and 7: Third-Party Designee and Signature

Authorize a designee if desired, then sign and date. Paid preparers must include their PTIN.

For multi-state employers, complete Schedule A to calculate credits per state. If in a credit reduction state, this impacts your credit.

FUTA Tax Rates, Credits, and Reductions for 2025

The base FUTA rate remains 6.0%, with a maximum 5.4% credit for state taxes paid on time. If state taxes are paid late, you get only 90% of the credit. Successor employers may claim credits on predecessor contributions.

For 2025, credit reductions apply to employers in California (1.2%) and the U.S. Virgin Islands (4.5%). This means higher effective FUTA rates in these jurisdictions due to unpaid federal loans. Connecticut and New York avoided reductions by repaying loans before November 10, 2025.

Use Schedule A to compute the reduction: Multiply FUTA taxable wages by the state’s rate and add to line 11.

Amending Form 940 and Penalties

If you discover errors, file an amended return by checking the box and explaining changes. E-file if possible. Penalties apply for late filing, payments, or deposits, including interest. To avoid them, deposit taxes timely via EFT and file on time. Request abatement with Form 843 if eligible.

Recent Changes and Updates for 2025

Key updates include:

Mandatory identification for aggregate filers.
Direct deposit for refunds and electronic payments for balances due.
Permanent inclusion of qualified moving and bicycle commuting reimbursements in FUTA wages (exclusion ended post-2025).
Electronic transcripts available for 2023 and later.
Spanish version (Form 940-SP) for Puerto Rico.

CPEOs and third-party payers have specific rules for credits and liabilities.

Common Mistakes to Avoid

Forgetting to attach Schedule A for multi-state or credit reduction scenarios.
Miscalculating exempt wages or the $7,000 wage base.
Late state tax payments reducing your credit.
Not signing the form or using the wrong EIN.
Ignoring electronic filing mandates for deposits over $500.

Double-check calculations and use IRS worksheets for accuracy.

Schedule A (Form 940): For credit reductions and multi-state details.
Schedule R (Form 940): For aggregate filers.
Form 941/943/944: Quarterly employment tax returns.
Form 8822-B: Change of address.
IRS.gov for e-filing, worksheets, and DOL site for state info.

For the latest, visit the IRS website or consult a tax professional.

FAQs About IRS Form 940

1. What if I’m a new employer?

New employers follow the same thresholds but may have prorated requirements—check IRS guidance.

2. Can I file Form 940 electronically?

Yes, and it’s recommended. Use approved software or IRS e-file providers.

3. What happens if I miss the deadline?

You’ll face penalties up to 5% per month, plus interest. File as soon as possible to minimize costs.

Most pandemic relief has expired, but confirm with current IRS notices.

By following these IRS Form 940 instructions, you’ll streamline your filing process and stay compliant for 2025. Always use official sources for the most accurate information, and consider professional advice for complex situations.