Glossary term
Form 940 - Employer's Annual FUTA Tax Return
Form 940 is the annual federal unemployment tax return employers use to report FUTA tax.
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What Is Form 940?
Form 940 - Employer's Annual FUTA Tax Return is the IRS form employers use to report annual Federal Unemployment Tax Act tax. FUTA tax helps fund unemployment compensation systems together with state unemployment tax systems.
The form is an employer payroll tax return. Employees do not pay FUTA tax through wage withholding, and employers should not deduct it from employee pay. The cost belongs to the employer and should be planned as part of payroll expense.
Key Takeaways
- Form 940 reports annual federal unemployment tax.
- FUTA is paid by employers, not withheld from employees.
- The return is separate from quarterly payroll tax forms such as Form 941.
- State unemployment taxes can affect the FUTA credit calculation.
- Small employers should treat FUTA as part of payroll cost planning.
How Form 940 Works
An employer uses Form 940 to calculate FUTA tax for the year, taking into account taxable wages, adjustments, state unemployment tax credit rules, and any credit reduction state issues. The form is annual, but deposits may be required during the year depending on the amount of FUTA tax owed.
The return is different from Form 941, which reports federal income tax withholding and Social Security and Medicare taxes on a quarterly basis for many employers. Form 940 focuses on unemployment tax.
Where It Affects Employers
For a business owner, Form 940 is a reminder that payroll cost is more than gross wages. Employer taxes, unemployment insurance, workers' compensation, benefits, and payroll administration all affect the true cost of hiring.
The form also connects federal and state systems. Employers generally pay state unemployment tax as well, and the federal FUTA calculation may depend on state credit rules. Multi-state employers may need additional schedules and closer coordination.
What To Watch
The main errors are treating FUTA as an employee tax, ignoring deposit obligations, or failing to account for state credit reductions. Employers should also distinguish employees from contractors correctly, because misclassification can affect payroll tax obligations.
For household employers, agricultural employers, and other specialized situations, the filing rules can differ. The correct return depends on the type of employer and wages paid.
Example
A small business with several employees may file Form 941 each quarter for withholding, Social Security, and Medicare taxes, then file Form 940 annually for FUTA. The forms are related because they are payroll forms, but they report different employer obligations.
Recordkeeping Context
Employers should keep payroll registers, state unemployment tax records, deposit confirmations, and worker classification support with their Form 940 records. Those details help explain the FUTA calculation if a return is questioned or amended later.
The Bottom Line
Form 940 is the annual return for employer FUTA tax. It matters because unemployment tax is a real payroll cost, and employers need to coordinate federal reporting, state unemployment systems, and deposit timing.