IRS Form 940 – IRS Forms, Instructions, Pubs 2026

IRS Form 940 – IRS Forms, Instructions, Pubs 2026 – In the complex world of payroll taxes, IRS Form 940 stands out as a critical filing for employers handling federal unemployment taxes. Whether you’re a small business owner, HR professional, or accountant, understanding Form 940 is essential to ensure compliance and avoid penalties. This comprehensive guide covers everything you need to know about the Employer’s Annual Federal Unemployment (FUTA) Tax Return, including who must file, how to calculate taxes, filing deadlines, and recent updates for the 2025 tax year. We’ll break it down step by step to help you navigate this form with confidence.

What Is IRS Form 940 and Its Purpose?

IRS Form 940, officially titled the Employer’s Annual Federal Unemployment (FUTA) Tax Return, is used by employers to report and pay their annual Federal Unemployment Tax Act (FUTA) liabilities. The FUTA tax funds unemployment compensation for workers who have lost their jobs, working in tandem with state unemployment tax systems. Unlike other payroll taxes, FUTA is paid solely by employers—it’s not withheld from employee wages.

The primary purpose of Form 940 is to calculate and report the FUTA tax owed for the calendar year. This tax helps provide a safety net for unemployed workers through federal and state programs. Most employers pay both federal FUTA and state unemployment taxes, but only the federal portion is reported on this form. If you’re wondering about related forms, Form 941 handles quarterly employment taxes, while Form 944 is for smaller employers filing annually.

Who Must File IRS Form 940?

Not every employer needs to file Form 940, but the thresholds are relatively low, catching many businesses in the net. You must file if:

  • 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 any 20 or more different weeks in 2024 or 20 or more different weeks in 2025.

Specific rules apply to certain employer types:

  • Household Employers: File only if you paid $1,000 or more in cash wages to household employees in any quarter. Otherwise, report on Schedule H (Form 1040), but you can opt to include it on Form 940 if filing other returns like Form 941.
  • Agricultural Employers: File if you paid $20,000 or more in cash wages to farmworkers in any quarter or employed 10 or more farmworkers during some part of a day for 20 or more weeks.
  • Indian Tribal Governments: Generally exempt if participating in the state unemployment system.
  • Tax-Exempt Organizations (501(c)(3)): Exempt in most cases, but liable if paying wages on behalf of non-exempt entities.
  • State and Local Governments: Typically exempt.

If you had no employees or paid no wages in 2025, you may still need to file a “no payments” return by checking box c. For businesses closing or stopping wage payments, mark it as a final return (box d). Always consult IRS guidelines to confirm your status.

FUTA Tax Rates and How to Calculate Your Liability

The standard FUTA tax rate is 6.0% (0.060) on the first $7,000 of wages paid to each employee annually, after subtracting exempt payments. However, employers can claim a credit of up to 5.4% for timely payments to state unemployment funds, reducing the effective federal rate to as low as 0.6%.

Key Calculations:

  1. Total Wages: Sum all payments to employees (salaries, bonuses, tips over $20/month, etc.).
  2. Exempt Payments: Subtract items like certain fringe benefits, group-term life insurance, retirement contributions, dependent care up to $5,000 per employee, and wages over $7,000 per employee.
  3. Taxable FUTA Wages: Total wages minus exemptions.
  4. FUTA Tax Before Adjustments: Taxable wages × 0.006.
  5. Adjustments:
    • If all wages are excluded from state tax: Add taxable wages × 0.054.
    • For partial exclusions or late state payments: Use the Line 10 Worksheet to calculate credits.
    • Credit Reductions: For 2025, apply reductions for states like California (1.2%) and U.S. Virgin Islands (4.5%). Use Schedule A (Form 940) for these.

The Line 10 Worksheet accounts for additional credits if your state experience rate is below 5.4%, late state payments (90% credit), and successor employer scenarios. Keep records but don’t attach the worksheet.

Component Description Rate/Threshold
FUTA Tax Rate Applied to first $7,000 per employee 6.0%
Maximum Credit For state unemployment taxes Up to 5.4%
Effective Rate After full credit 0.6%
Credit Reduction (CA, 2025) Additional tax 1.2%
Credit Reduction (VI, 2025) Additional tax 4.5%

Filing Deadlines and Deposit Requirements for 2025

For the 2025 tax year, Form 940 is due by February 2, 2026. If you’ve deposited all FUTA taxes on time, you get an extension to February 10, 2026.

Deposits:

  • If your FUTA liability exceeds $500 in a quarter, deposit by the last day of the following month (e.g., April 30 for Q1).
  • For liabilities of $500 or less, carry over to the next quarter.
  • Use Electronic Federal Tax Payment System (EFTPS) or other electronic methods; penalties apply for late or insufficient deposits.

File electronically for faster processing—it’s encouraged by the IRS. Paper filers should mail to the appropriate address based on your location and whether including payment.

Step-by-Step Guide to Completing IRS Form 940

Filling out Form 940 involves seven parts. Here’s a simplified walkthrough based on the 2025 instructions:

Top Section:

  • Enter your EIN, legal name, trade name, and address.
  • Check boxes for return type (amended, successor, no payments, final).
  • Aggregate filers: New for 2025—identify as section 3504 agent, CPEO, or other third party.

Part 1: About Your Return

  • Line 1: State(s) where you pay unemployment taxes.
  • Line 2: Check if in a credit reduction state.

Part 2: FUTA Tax Before Adjustments

  • Lines 3-8: Calculate total wages, exemptions, taxable wages, and initial tax (as outlined above).

Part 3: Adjustments

  • Lines 9-11: Apply exclusions, worksheet adjustments, and credit reductions.

Part 4: Tax and Balance

  • Line 12: Total tax after adjustments.
  • Lines 13-15: Deposits, balance due, or overpayment. New: Opt for direct deposit refund by providing routing/account details.

Part 5: Quarterly Liability (If >$500 Total)

  • Break down liability by quarter.

Parts 6-7: Designee and Signature

  • Authorize a third party if needed, then sign.

For multi-state or credit reduction scenarios, attach Schedule A. Aggregate filers attach Schedule R.

Common Mistakes to Avoid When Filing Form 940?

Avoid these pitfalls to prevent audits or penalties:

  • Miscalculating taxable wages by forgetting exemptions or the $7,000 cap.
  • Missing credit reductions for states like California, leading to underpayment.
  • Late state unemployment tax payments, reducing your credit.
  • Failing to identify as an aggregate filer (new requirement).
  • Not depositing taxes timely, voiding the February 10 extension.
  • Incorrect EIN or name mismatches on direct deposit info.

Double-check calculations and keep detailed records for at least four years.

Recent Updates and Changes for the 2025 Tax Year

The IRS has introduced several updates for 2025 filings:

  • Aggregate Filer Identification: Must specify type on the form.
  • Direct Deposit for Refunds: Now available for overpayments, per Executive Order 14247.
  • Credit Reductions: Confirmed for California (1.2%) and U.S. Virgin Islands (4.5%), increasing FUTA costs.
  • Electronic Filing Enhancements: Amended returns can now be e-filed in some cases.

Stay updated via IRS.gov, as changes can occur due to legislation.

Resources and Where to Download IRS Form 940 PDF

For official guidance:

If you need help, consider consulting a tax professional or using IRS e-file options. Filing accurately and on time ensures smooth operations and avoids costly penalties. For more tax tips, explore our guides on related forms like IRS Form 941.