Form 940 For Small Businesses: Who Files It and Why

If you run a business with employees, you’ve probably dealt with more than your fair share of tax forms. One that often flies under the radar (until it’s due, at least) of most small business owners is Form 940. This little form is tied to a very specific employer tax responsibility that might also be skipped over before it has to be dealt with: federal unemployment tax, also known as FUTA.

Even if you’ve got a solid handle on income tax withholding and payroll taxes, Form 940 plays a unique role and is important for staying compliant with federal employment laws. So, let’s walk through what it is, who needs to file it, how it works, and what you should watch out for in 2025.

What Is Form 940?

Form 940 is used to report and pay the Federal Unemployment Tax Act (FUTA) tax. This is a federal tax that provides funding for unemployment compensation to workers who lose their jobs. While employees don’t see this tax coming out of their paychecks, it’s your responsibility as the employer to pay it.

The tax helps fund unemployment programs administered by states, but the FUTA tax itself is federal and separate from your state unemployment taxes. In short, Form 940 is how you let the IRS know what you owe for federal unemployment and whether you’ve already paid it.

Who Needs to File Form 940?

You need to file Form 940 if you paid wages of $1,500 or more to employees in any calendar quarter during the year. You also need to file it if you had one or more employees for at least part of a day in 20 different weeks during the year. These don’t need to be consecutive weeks, and part-time or seasonal workers count, too.

If you’re a sole proprietor and the only people working for you are your spouse or kids, you might be off the hook. But in most typical business scenarios—especially if you have W-2 employees—you’ll need to deal with Form 940.

Remember the basic federal unemployment tax rate is 6% on the first $7,000 of each employee’s wages for the year (as of 2025). Some states do offer a credit for state unemployment taxes, however, which goes up to 5.4%. Finally, if you’re an employer and have employees in more than one state, you must file Form 940’s Schedule A as well.

How the FUTA Tax Works

The FUTA tax rate is currently 6.0% on the first $7,000 of wages you pay to each employee in a calendar year. That means the maximum FUTA tax per employee is $420 annually.

However, most employers qualify for a credit of up to 5.4% if they pay their state unemployment taxes on time and in full. That brings the effective FUTA tax rate down to 0.6%, or just $42 per employee. This credit system is meant to encourage employers to stay in good standing with their state unemployment programs.

The full 6.0% tax applies if you’re in a state that’s had to borrow from the federal government to pay unemployment benefits and hasn’t repaid it—these are known as credit reduction states. The IRS releases an updated list of these states each year, so it’s something to check when preparing your Form 940.

When and How to File Form 940

Form 940 is due by January 31 each year, covering the wages you paid in the previous calendar year. So for wages paid in 2024, the form is due by January 31, 2025.

You can file Form 940 electronically through the IRS e-file system or by mailing a paper return. Many businesses choose to use payroll software or a payroll provider, which typically includes FUTA tracking and filing as part of their service. If you’re filing on paper, where you send it depends on whether you’re enclosing a payment with the form and your state.

If you owe more than $500 in FUTA tax for the year, the IRS expects you to make quarterly payments. If your total FUTA liability for the year is $500 or less, you can just pay it when you file Form 940.

Common Mistakes to Avoid When Filing Form 940

While filing Form 940 might seem straightforward, and it is, there are a few areas where small errors can lead to big headaches. Case in point, one big mistake is failing to apply the full state tax credit when you’re eligible for it which can result in overpaying or incorrectly calculating your tax due.

Another common issue is forgetting to make quarterly deposits if your FUTA tax exceeds $500, and missing those deposit deadlines can lead to penalties and interest.

Also, be careful when reporting wages. Only the first $7,000 paid to each employee is subject to FUTA tax, so wages above that threshold shouldn’t be included in your tax calculation.

The Difference Between Forms 940, 941, and Others

Don’t mix up Form 940, which is meant for employers to rapport unemployment tax, with other employer tax forms. Here’s a quick rundown of the differences:

• Formulario 941: This is a quarterly return where employers report income tax withholdings and both the employee and employer shares of Social Security and Medicare taxes (FICA).
• Form 943: Used by agricultural employers to report taxes once a year, including the withheld federal income and FICA taxes for both the employee and employer.
• Form 944: This one’s for smaller employers who have a total annual tax liability of $1,000 or less. Instead of filing quarterly, they can file this annual return instead, which goes a long way to making things more manageable.

 

Each form serves a different purpose, so be sure to double (and triple) check and use the right one!

Why IRS Form 940 Matters

While FUTA tax may feel like just another employer burden, it plays a significant role in supporting the safety net for unemployed workers. Staying compliant with your Form 940 obligations not only avoids penalties but also keeps your business running smoothly with both the IRS and your state agencies.

If you skip this form, miss a deadline, or underpay, you could face fines, interest charges, and even more paperwork. And while it’s tempting to think of it as just another annual form, your recordkeeping and payroll accuracy throughout the year have a direct impact on getting it right.

The Final Word on Form 940

If you’re an employer in the U.S., understanding Form 940 is an important part of your annual tax responsibilities. It may not be the most talked-about form, but it serves a key function in keeping your business in good standing and supporting national unemployment programs. Filing Form 940 correctly ensures that your federal unemployment tax obligations are squared away and keeps the IRS off your back. Whether you handle it yourself, work with an accountant, or use payroll software, the key is to stay informed, pay on time, and double-check your numbers. Your future self—and your business—will thank you.

Form 940: FAQ

1. What exactly is Form 940 and why does it matter?
Form 940 is the IRS form that employers use to report and pay their federal unemployment tax, also known as FUTA. This tax helps fund unemployment programs at the federal level, and although employees don’t pay into it, employers are required to.

Even though it may not seem as urgent as income tax forms, it’s a big deal when it comes to staying compliant with employment laws. Ignoring or forgetting about it can lead to penalties, interest, or issues with your overall tax standing. So if you have employees and meet the basic criteria, Form 940 should definitely be on your annual tax to-do list.

2. How do I know if I need to file Form 940?
You generally need to file Form 940 if you paid $1,500 or more in total wages during any calendar quarter, or if you had at least one employee working for you during 20 or more different weeks of the year. The employee doesn’t need to be full-time, and the weeks don’t have to be consecutive.

If you’re not sure whether you hit these thresholds, it’s a good idea to double-check your payroll records or talk to your accountant. The IRS looks at this data closely, so it’s better to be cautious and file if you’re on the edge.

3. How is the FUTA tax calculated?
FUTA tax is calculated on the first $7,000 you pay to each employee in a calendar year. The base rate is 6.0%, which would be $420 per employee if you had to pay the full amount. But here’s where it gets better: most employers qualify for a credit of up to 5.4% if they pay their state unemployment taxes on time.

That brings the actual rate down to just 0.6%, or $42 per employee. The catch is that if your state owes money to the federal government for unemployment loans and hasn’t paid it back, you could lose part of that credit. These are called credit reduction states, and the IRS updates that list annually.

4. When is Form 940 due and how do I file it?
Form 940 is due by January 31 of the following year. So if you’re reporting wages from 2024, your form is due by January 31, 2025. However, if you’ve already paid all your FUTA taxes in full and on time throughout the year, the IRS may allow you to file by February 10.

You can file electronically using the IRS e-file system, or you can mail a paper return, though most employers are moving toward digital filing because it’s quicker and more trackable. If you’re working with a payroll service, they may handle the filing for you automatically.

5. What happens if I don’t file Form 940 or make my payments late?
Missing your Form 940 deadline or paying your FUTA taxes late can lead to penalties and interest. The IRS typically charges a percentage of the unpaid tax as a penalty, and that amount increases the longer the balance remains unpaid. There’s also interest on top of that, which compounds over time.

On top of the financial cost, falling behind on payroll tax filings can raise red flags for the IRS and could cause bigger problems if you’re ever audited. It’s one of those forms where staying ahead really pays off.

6. Do I still have to file Form 940 if I only have contractors and not employees?
No, you generally don’t have to file Form 940 if the people doing work for you are classified as independent contractors rather than employees. FUTA tax only applies to employee wages, not contractor payments.

But here’s the tricky part—misclassifying employees as contractors is a common mistake, and if the IRS decides those workers should’ve been treated as employees, you could be on the hook for back taxes and penalties. So if you’re unsure how your workers should be classified, it’s smart to review the rules or talk with a tax professional before deciding not to file.

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