IRS Form 940 Script
Hi everyone, I'm Priyanka Prakash, senior staff writer at Fundera.
Today, I'll be showing you how to fill out Form 940: Employer’s Annual Federal Unemployment
Tax Return, more commonly called the FUTA tax return.
You must file this form if you paid $1,500 or more in wages to employees during a calendar
quarter of this year or the previous year, or if you employed anyone for at least 20
weeks of the year.
This form is due on January 31.
However, you get an additional 10 calendar days to file if you deposited all your FUTA
taxes on time throughout the year.
Now, most employers have to pay FUTA at the federal level and state unemployment tax.
As you’ll soon see, the two are closely related.
As a reminder, FUTA tax is only paid by employers, so this is not a tax that you would deduct
from your employees’ wages.
Okay, let's get started with the form.
The top of the form is pretty straightforward.
You're just going to note down your business contact information, including the EIN, business
name, and business address.
I'll provide this information for a fictional business called ABC Bakery LLC.
If your business operates under a trade name that's different from your business legal
name, you should also fill out the trade name box.
Note that you must have an employer identification number to file this form.
If you don't have an EIN, you can apply for one for free using form SS-4.
Most of you watching this video will leave these boxes on the right blank, but these
might apply to you if you're filing an amended Form 940, recently acquired a business that
had FUTA tax liabilities, did not pay any wages for the year, or if you're closing down
your business or completely stopped paying wages.
In Part 1, start by indicating whether you had to pay unemployment taxes in one state
or in multiple states.
If it's just in one state, you'll provide the state abbreviation in box 1a, and if you
had to pay state unemployment taxes in multiple states, you will check off box 1b and complete
and attach the accompanying Schedule A to Form 940.
This is how Schedule A looks.
You would simply provide your EIN and business name and check off the boxes for the states
in which you had to pay state unemployment tax.
Even if your state unemployment tax rate for your business was zero, you have to fill out
either box 1a or check off box 1b.
You can only leave both of these blank if the wages that you paid to your employees
were completely exempt from state unemployment taxes.
In this example, I'll say that ABC Bakery paid wages in just one state—New York.
In line 2, indicate whether you paid wages in a credit reduction state.
A credit reduction state is a state which borrowed money from the federal government
to pay unemployment benefits and hasn't paid it back.
As a result, you might have to pay more FUTA taxes.
The Department of Labor maintains an updated list of credit reduction states, and usually
just one or two, sometimes no states, end up as credit reduction states for the year.
If your state is a credit reduction state, you would check off the box in line 2 and
attach Schedule A to Form 940.
New York usually is not a credit reduction state, so we'll leave this box blank in our
example.
Part 2 is where you determine your business’s FUTA tax liability for the year.
In line 3, provide all wages, commissions, bonuses, fringe benefits, and other types
of compensation that you paid to your employees during the year.
Let's say ABC Bakery only has two employees and paid each of them $50,000 for a total
of $100,000 in employee payments.
In line 4, identify how much of those wages, if any, was exempt from FUTA taxation and
why.
For instance, employer contributions to employee retirement plans or to health plans are not
taxable under FUTA.
In this example, let's say $2,000 of the $100,000 in payments was exempt because of retirement
plan contributions.
We’ll assume ABC Bakery paid $1,000 to each of its two employees in the form of retirement
plan contributions.
We’ll note down the total $2,000 in exempt payments and the reason is that it was a retirement
plan contribution.
In line 5, indicate the total of taxable payments made to employees in excess of $7,000.
This is important because you only have to pay FUTA taxes on the first $7,000 that you
paid to each employee each year.
Anything over the $7,000 wage base per employee is exempt from FUTA taxes.
In this example, each employee received $49,000 in taxable wages after accounting for the
$1,000 each in retirement plan contributions.
That $49,000 of taxable wages is $42,000 over the $7,000 wage base.
If you add up $42,000 for each of the two employees, that gives us $84,000 in excess
payments.
In line 6, add up lines 4 and lines 5, which in this case gives us $86,000.
In line 7, you can see your total FUTA taxable wages by subtracting line 6 from line 3.
That gives us $14,000 in this example.
In line 8, multiply the number you got in line 7 by .006 because the FUTA tax rate is
currently 0.6% for businesses that paid their state unemployment taxes on time.
In this example, that multiplication gives us at $84.
Part 3 is where you'll have to make certain adjustments for state unemployment taxes if
this applies to you.
Item 9 and 10 show that if some or all of the wages that you paid were exempt from state
unemployment taxes, you have to pay a higher FUTA tax rate of up to 6%, and items 9 or
10 is where you would account for that difference.
You also have to take an adjustment here in line 11 if you paid wages in any credit reduction
state.
We’ll assume none of these apply in our example since the state of New York normally
mirrors federal law for unemployment tax purposes, and New York is normally not a credit reduction
state.
In part 4, you would add in any adjustments to your total FUTA tax liability.
Here, the total of $84 remains unchanged since none of the adjustments in part 3 applied
to ABC Bakery.
So, we'll bring down the $84 from line 8 down to line 12.
In line 13, you'll need to note the amount of FUTA taxes that you've already deposited
for the year.
Businesses deposit food or taxes on a quarterly basis throughout the year, typically using
EFTPS, which is the Electronic Federal Tax Payment System.
On this form, you'll be able to assess whether you have an outstanding balance of FUTA taxes
owed, or if you overdeposited your taxes throughout the year.
In this example, I’ll assume that ABC Bakery deposited $74 throughout the year.
That means they have a balance of $10 due.
As the instructions here indicate, since this $10 is less than $500, I can simply include
the $10 payment when filing this form.
If you have an overpayment, you can choose whether to receive a check as your refund
or to have the overpayment applied to your business's next tax return.
Let's move on to page 2.
Don't forget to provide your business name and EIN again at the top so that the IRS does
not lose any of your paperwork.
If your annual FUTA tax due, as shown on line 12, is greater than $500, you'll need to break
down the amount that you owed for each quarter of the year.
I will skip this section because my fictional business’s FUTA liability was only $84 in
line 12.
In part 6, you can designate a tax preparer, lawyer, employee, or another individual to
speak to the IRS on your business's behalf about this form.
I'll just check off “no” here and assume that the owner of ABC Bakery LLC does not
want to designate any third party.
Finally, don't forget to sign and date the form at the bottom and provide your name,
title, and phone number.
You can only sign and date after you print out the form, so I’ll leave those items
blank for now and fill out the rest.
I'll assume that Betty Business, the CEO of ABC Bakery, filled out this form.
If you hired someone to help you complete Form 940, they should fill out their information
in the paid preparer section.
And that's it for your FUTA tax return—IRS Form 940.
There's a payment voucher at the bottom of the form, which you'll need if you're going
to be including payment with your return.
The accompanying IRS instructions to this form will tell you the mailing address to
file your return based on where your business is located and whether you'll be including
a payment with the form or not.
If you need additional help in filing Form 940, we recommend purchasing payroll software.
Gusto offers payroll software for small businesses and assistance with filing a variety of payroll
tax forms, including Form 940.
We hope this was helpful in helping you complete Form 940.
For more tax information and small business insights, head over to https://fundera.com/blog,
and subscribe to our YouTube channel for more videos.
Thanks for watching, everyone.