When you are running a business or managing a team with employees, you are responsible for salaries, also you need to comply with federal tax obligations. The IRS Form 940 is the most requirement for employers, which is used to report FUTA (Federal Unemployment Tax Act) taxes. To be aware of the 940 form and how it fits into your annual payroll process is crucial for avoiding penalties and keeping your business in good standing with the IRS.

Table of content

1. What Is IRS Form 940? 
2. What Is the FUTA Tax Rate?
3. List of FUTA Credit Reduction States for Tax Year 2025: 
4. Who Needs to File Form 940?
5. When Is Form 940 Due?
6. What Goes Into Form 940?
7.  How to Pay FUTA Taxes 
8. Common Mistakes to Avoid 
9. Tips for Staying Compliant with FUTA Tax
10. How SecurePayStubs Can Help

What Is IRS Form 940? 

IRS Form 940, officially titled “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” is a form used by employers to report and pay federal unemployment taxes. 

FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs. While FUTA taxes are collected by the IRS, they are used to support state workforce agencies and unemployment programs. 

Importantly, FUTA tax is paid only by employers, not by employees unlike Social Security or Medicare taxes. 

What Is the FUTA Tax Rate?

For most employers, the FUTA tax rate is: 

• 6.0% on the first $7,000 of each employee’s wages annually. 

However, employers can typically receive a credit of up to 5.4% if they pay state unemployment taxes on time and in full. This brings the effective FUTA tax rate down to 0.6%. 

For example: 

• If you paid at least $7,000 to an employee in a year and qualify for the full credit, you’ll owe $42 (0.6% of $7,000) per employee annually. 

 Note: If your state has outstanding loans from the federal government for unemployment funds, your credit may be reduced, increasing your FUTA tax liability. 

List of FUTA Credit Reduction States for Tax Year 2025: 

According to the U.S. Department of Labor, employers operating in the following jurisdictions are subject to FUTA credit reductions—which increases their effective FUTA tax rates in 2025 

Who Needs to File Form 940?

You must file Form 940 if you meet either of the following conditions: 

• You paid wages of $1,500 or more to employees in any calendar quarter during the year, OR 

• You had one or more employees working for you during 20 or more different weeks in the year (these do not have to be consecutive weeks). 

This includes part-time, temporary, and seasonal workers. If either condition is met, you’re subject to FUTA tax and must file the 940 tax form. 

When Is Form 940 Due?

The Form 940 due date is January 31 of the following year. 

Example: For wages paid in 2025, the FUTA 940 tax form is due by January 31, 2026. 

If you deposited all your FUTA taxes when due throughout the year, you get an extended deadline of February 10. 

What Goes Into Form 940?

When completing FUTA Form 940, you will need: 

• Employer Identification Number (EIN) 
• Business name and address 
• Total payments made to employees 
• Amounts exempt from FUTA tax (e.g., wages over $7,000 per employee) 
• State unemployment contributions paid 
• Adjustments for state unemployment tax credits 
• Total FUTA tax due or overpaid 

You must also indicate whether you live in a credit reduction state (if applicable).

 How to Pay FUTA Taxes 

FUTA taxes are not withheld from employee wages; they are fully employer paid. Here’s how the payment works: 

• FUTA taxes are not withheld from employee wages; they are fully paid by the employer. 

• If your FUTA tax liability is more than $500 in any quarter, you must deposit it by the IRS deadline. If it is $500 or less, you can carry it forward to the next quarter or pay it when you file Form 940 at the end of the year. 

Payments must be made electronically using the Electronic Federal Tax Payment System (EFTPS). 

Common Mistakes to Avoid 

Filing IRS Form 940 is straightforward, but mistakes can trigger IRS notices or penalties. Watch out for: 

• Using the wrong FUTA tax rate 
• Reporting incorrect wage amounts 
• Failing to file if you meet wage or employment thresholds 
• Missing quarterly deposit deadlines 
• Not reconciling with state unemployment tax payments 

Tips for Staying Compliant with FUTA Tax

• Track payroll carefully: Ensure you’re accurately calculating the first $7,000 in wages for each employee. 
• Pay state unemployment tax on time: To qualify for the full credit and reduce your FUTA rate. 
• Deposit taxes quarterly: If your FUTA liability exceeds $500. 
• Use IRS e-file: It’s the fastest and most secure method for filing Form 940. 
• Use accurate paystubs: Paystub tools like SecurePayStubs can help track earnings and ensure correct payroll tax reporting. 

How SecurePayStubs Can Help

Filing FUTA taxes is simpler when your payroll records are accurate and well-documented. SecurePayStubs helps you stay organized by providing: 

• Easy paystub generation with tax deductions based on W-4 inputs 
• Automated calculations of wages and employer-paid taxes 
• Downloadable and printable stubs for precise recordkeeping 
• Support for small businesses, freelancers, and growing teams 
• Time-saving documentation that simplifies year-end tax preparation, including Form 940 

When you are ready to file Form 940, you can e-file securely through IRS-authorized providers like TaxZerone.com