IRS Form 940

From AIM Financial — Business Tax Preparation in Grand Rapids, Kentwood, Wyoming, and West Michigan

Running a business means managing more than sales, expenses, and income taxes. If you have employees, you may also have federal employment tax responsibilities, including Federal Unemployment Tax Act (FUTA) tax. One important form employers need to understand is IRS Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.

AIM Financial helps individuals and businesses understand their tax reporting responsibilities and prepare for accurate tax filing. This guide explains Form 940 in plain English, including who must file, how the form works, payment deadlines, and common mistakes employers should avoid.

What Is IRS Form 940?

Form 940 is the annual federal tax return employers use to report their FUTA tax liability. FUTA tax helps fund federal and state unemployment compensation programs for eligible workers who lose their jobs.

FUTA tax is generally paid by the employer. Employers do not deduct FUTA tax from employees’ paychecks. This differs from Social Security and Medicare taxes, which generally involve both employer and employee contributions. <Cite refs={[“turn376094search0″,”turn376094search1”]}/>

Form 940 is an annual return, but businesses may need to deposit FUTA taxes during the year rather than wait until the return is filed.

Who Must File Form 940?

For the 2025 tax year, most employers generally must file Form 940 if either of these conditions applies:

• They paid $1,500 or more in wages to employees during any calendar quarter in 2024 or 2025.
• They had at least one employee working for at least part of a day during 20 or more different weeks in 2024 or 2025.

Full-time, part-time, and temporary employees generally count toward the weekly test. Partners in a partnership are not counted as employees for this particular test.

Special rules apply to household employers and agricultural employers. Certain tax-exempt organizations, government entities, and other employers may also qualify for exceptions. <Cite refs={[“turn376094search0″,”turn376094search1”]}/>

Business owners should not assume they are exempt simply because they have only a few employees or operate seasonally. Reviewing the applicable rules can help determine whether filing is required.

How Much Is FUTA Tax?

The federal FUTA tax rate is generally 6% on the first $7,000 of FUTA-taxable wages paid to each employee during the calendar year.

However, most employers that pay state unemployment taxes on time can claim a credit of up to 5.4 percentage points. This often results in an effective FUTA rate of 0.6%.

For example, if an employee receives $20,000 in wages during the year, only the first $7,000 is generally subject to FUTA tax. If the employer qualifies for the maximum credit, the basic FUTA tax for that employee would be $42:

$7,000 × 0.6% = $42.

The actual amount may be higher when the employer does not qualify for the full credit or is subject to a state credit reduction. State unemployment wage bases and tax rules can differ from federal rules. <Cite refs={[“turn376094search0″,”turn376094search1”]}/>

How to Complete Form 940 in Layman’s Terms

Form 940 has several sections designed to help employers calculate their annual federal unemployment tax.

Part 1: Identify State Unemployment Tax Information

Employers indicate whether they paid state unemployment taxes in one state or multiple states. Businesses operating in more than one state may need to complete Schedule A (Form 940).

This section also addresses whether the employer paid wages in a state subject to a FUTA credit reduction.

Part 2: Calculate FUTA-Taxable Wages

This section starts with total payments made to employees. Employers then identify payments exempt from FUTA tax and amounts paid to employees above the $7,000 federal wage base.

The result is the employer’s total FUTA-taxable wages. The form uses this amount to calculate the tax before adjustments.

Accurate payroll records are important because not every payment is treated the same way for tax purposes.

Part 3: Calculate Adjustments

Employers may need to adjust their FUTA tax calculation if certain wages are excluded from state unemployment tax or state unemployment contributions were paid late.

The calculations can be more complicated for businesses with multiple locations, unusual compensation arrangements, or state-specific payroll issues.

Part 4: Determine FUTA Tax After Adjustments

This section calculates the tax after applying relevant credits and adjustments. Employers should carefully review the figures against their payroll records and state unemployment tax information.

Part 5: Determine the Balance Due or Overpayment

The final tax calculation takes account of deposits and other applicable amounts to determine whether the employer owes additional tax or has overpaid.

The employer must complete the required certification and signature section before submitting the return.

Always use the official Form 940 and instructions for the specific tax year. Line numbers and filing details can change.

When Is Form 940 Due?

The deadline for filing the 2025 Form 940 was February 2, 2026. Employers that deposited all FUTA tax when due generally had until February 10, 2026, to file.

For the 2026 tax year, the regular filing deadline will generally be January 31, 2027, subject to applicable weekend and holiday rules. Verify the IRS instructions for the 2026 return when available. <Cite refs={[“turn376094search0″,”turn376094search1”]}/>

Employers must also monitor deposit requirements throughout the year. If accumulated FUTA tax liability exceeds $500, a deposit is generally required. Amounts of $500 or less can generally be carried forward to the next quarter until the threshold is exceeded.

Federal tax deposits must be made electronically using an approved payment method. Waiting until the annual return is due can result in late-deposit penalties if deposits were required earlier.

Common Form 940 Mistakes to Avoid

Business owners should watch for these common errors:

• Forgetting to file because the business has only a few employees.
• Calculating FUTA tax on all wages instead of applying the $7,000 federal wage base.
• Incorrectly claiming the maximum state unemployment tax credit.
• Overlooking Schedule A when wages are paid in multiple states or a credit reduction state.
• Missing required deposits during the year.
• Using the wrong tax year’s form or payroll figures.
• Failing to file a final return when the business closes or stops paying wages, when required.

Keeping payroll reports, employee wage records, state unemployment tax statements, and deposit confirmations organized can make preparing Form 940 easier.

How AIM Financial Can Help With Business Tax Preparation

Payroll tax compliance is an important part of running a successful business. Mistakes in federal unemployment tax calculations, deposit schedules, or annual reporting can lead to unnecessary costs and extra administrative work.

AIM Financial provides tax preparation support for individuals and businesses in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan. Whether you operate a small business, manage a growing team, or need help organizing your annual tax reporting, professional assistance can help you understand your filing responsibilities.

If you need help reviewing Form 940, organizing business tax records, or preparing your federal income tax return, contact AIM Financial to discuss your tax preparation needs.

Don’t leave payroll tax reporting until the last minute. Contact AIM Financial for assistance with business tax preparation and year-end tax reporting.

This article is for general educational purposes only and is not individualized tax advice. Filing requirements and tax calculations depend on your circumstances. Consult the current IRS Form 940 instructions or a qualified tax professional for guidance specific to your business.