Form 940 explained
Employer's Annual Federal Unemployment (FUTA) Tax Return
Form 940 is the annual return an employer files to report federal unemployment tax. The tax is paid by the employer alone and is never withheld from an employee's pay.
- Who files it
- Employers who paid wages above a threshold in any quarter, or who employed staff for part of enough weeks in the year. Household and agricultural employers have their own tests.
- Where it goes
- The IRS. It is a federal return, separate from the state unemployment filings.
- When it is due
- 31 January for the previous calendar year, extended to 10 February when all the tax due was deposited on time.
- What it is not
- It is not a payroll tax withheld from wages. FUTA is an employer cost, and an employee's pay stub never shows it.
What it reports
The return is short. What makes it fiddly is the credit, which is where almost every 940 question comes from.
| Part | What it reports |
|---|---|
| Part 1 | Which state or states the employer paid unemployment tax to, and whether any is a credit reduction state. |
| Part 2 | Total payments to employees, payments exempt from FUTA, and payments above the per-employee wage base. |
| Part 3 | The credit for state unemployment tax paid, and any credit reduction that applies. |
| Parts 4 and 5 | The tax owed after the credit, deposits already made, and the balance or overpayment. |
The credit is why the rate people quote is wrong
FUTA is charged at 6.0% on the first portion of each employee's wages for the year. An employer who paid its state unemployment tax on time claims a credit of up to 5.4%, leaving 0.6% in practice. The headline rate and the rate almost everybody actually pays are therefore nine times apart.
A state that has borrowed from the federal unemployment account and not repaid becomes a credit reduction state, and employers there lose part of the credit. The list changes annually and is published by the Department of Labor.
Form 940 is annual, Form 941 is quarterly
The two are confused constantly. Form 941 reports income tax withheld and the Social Security and Medicare tax on wages, every quarter. Form 940 reports unemployment tax, once a year, and nothing on it is withheld from anyone.
LedgerBox does not read this form
LedgerBox does not read Form 940. It reads the pay stubs behind the payroll figures, and the bank statements the deposits appear on.
Form 940 questions
Is FUTA withheld from an employee's pay?
No. It is paid entirely by the employer, and an employee's pay stub never shows it.
What is the difference between Form 940 and Form 941?
Form 940 is annual and reports unemployment tax. Form 941 is quarterly and reports withheld income tax plus Social Security and Medicare tax.
What is a credit reduction state?
A state that has an outstanding loan from the federal unemployment account. Employers there lose part of the 5.4% credit, so their effective FUTA rate is higher. The list is published annually.
Read next
- Pay stub extraction The payroll documents behind the figures on the return.
- Form W-2 The annual per-employee statement from the same payroll.
- Convert bank statements to Excel and CSV Where the tax deposits appear.
Reference pages on the forms that arrive with a set of books. Every form in the glossary