For founders steering startups, agencies, or e-commerce ventures, understanding your tax obligations can feel overwhelming. Yet, timely and accurate tax filings aren’t just regulatory checkboxes; they secure your business’s financial health and reputation. One essential form every employer in the U.S. must tackle annually is Form 940—the Employer’s Annual Federal Unemployment (FUTA) Tax Return. This guide unpacks what Form 940 involves, why it matters for your startup, and how to navigate the filing process with clarity and confidence.

Whether you’re the CEO, COO, or Head of Finance, this practical overview will help you avoid common pitfalls, leverage tax credits, and integrate Form 940 filing into your broader tax strategy effectively.

What Is Form 940 and Why Does It Matter to Founders?

Form 940 reports your business's annual Federal Unemployment Tax Act (FUTA) tax—the federal tax that funds unemployment benefits for workers who have lost their jobs. As an employer, your contributions support this national safety net.

Unlike payroll taxes withheld from employee paychecks, FUTA tax is entirely the employer's responsibility.

Key Facts About Form 940

• Applicability: You must file Form 940 if you paid \$1,500 or more in wages during any calendar quarter, OR if you had at least one employee working for some part of a day in 20 or more different weeks in the calendar year.

• FUTA Wage Base: The tax applies to the first \$7,000 you pay to each employee during the calendar year, after subtracting any exempt payments.

• Tax Rate: The standard FUTA tax rate is 6.0% (0.060) on the FUTA wage base.

• Effective Rate (Credit): Most employers receive a credit of up to 5.4% (0.054) if state unemployment taxes were paid on time, resulting in an effective FUTA rate of 0.6% (0.006).

Who Must File and When is it Due?

Except for certain exemptions (like most tax-exempt 501(c)(3) organizations or Indian Tribal Governments who comply with state law), you must file if you meet either of these two tests for 2024 or 2025:

1. Wage Test: You paid wages of \$1,500 or more in any calendar quarter.

2. Employment Test: You had one or more employees for at least some part of a day in 20 or more different weeks.

Important: If you're not liable for FUTA tax because you made no payments to employees in 2025, check box 1c on Form 940, sign the form, and file it. If your business closed or stopped paying wages, check box 1d.

When is Form 940 Due?

The due date for filing Form 940 for 2025 wages is generally February 2, 2026.

However, if you deposited all your FUTA tax when it was due, you get an extension and may file Form 940 by February 10, 2026.

Step-by-Step Guide: Filing Form 940 Successfully

1. Identify Your FUTA Tax Status (Part 1)

Before calculating the tax, tell the IRS about your status in Part 1:

• Line 1a: If you paid state unemployment tax in one state only, enter the two-letter state abbreviation.

• Line 1b: If you paid state unemployment tax in more than one state (multi-state employer), check this box and complete Schedule A (Form 940).

• Line 2 (Credit Reduction): If you paid wages in a state subject to Credit Reduction (a state that hasn't repaid federal unemployment loans), check this box and complete Schedule A (Form 940).

2. Determine Your Total Taxable Wages (Part 2)

The main goal of Part 2 is to determine the final amount of Total Taxable FUTA Wages (Line 7) by subtracting exempt payments and payments over the wage base from total wages.

3. Determine Your Adjustments (Part 3)

Part 3 accounts for situations where you cannot claim the full 5.4% credit, which increases your final FUTA tax due.

• Line 9: All Wages Excluded. If all of your taxable FUTA wages were excluded from state unemployment tax (e.g., all wages paid only to corporate officers, if your state excludes them), multiply Line 7 by 0.054. You must pay the full 6.0% (0.006 on Line 8 + 0.054 on Line 9).

• Line 10: Some Wages Excluded or Late SUI Payments. If some taxable FUTA wages were excluded from state SUI or you paid any state SUI tax late (after the Form 940 due date), you must complete the Worksheet-Line 10 in the instructions to calculate the adjusted amount. Enter the result from the worksheet's line 7 here.

• Line 11: Credit Reduction Applies. If credit reduction applies (from Part 1, Line 2), enter the total from Schedule A (Form 940) here.

4. Determine Tax Due and Payment (Part 4)

• Line 12: Total FUTA Tax After Adjustments. Sum up Line 8 + Line 9 + Line 10 + Line 11. This is your total FUTA tax liability for the year.

• Line 13: FUTA Tax Deposited. Enter the amount you already deposited during the year.

• Line 14: Balance Due (Payment Required). If Line 12 is greater than Line 13, you have a balance due.

Deposit Requirements for Balance Due (Line 14)

Founders must adhere to FUTA deposit rules to avoid penalties:

• If Line 12 is More than \$500: You must deposit the tax quarterly (see Part 5). If your final Line 14 balance is more than \$500, you must deposit it electronically.

• If Line 12 is \$500 or Less: You can either deposit the tax or pay it in full with Form 940 by the due date.

5. Report Quarterly Liability (Part 5)

Complete Part 5 (Lines 16a-16d) ONLY IF your final tax liability (Line 12) is more than \$500.

• Purpose: Part 5 requires you to break down your liability (not your deposit amount) by quarter.

• Line 17: The total liability must equal Line 12.

6. Sign and Date (Part 7)

A failure to sign the form will delay processing. Ensure the authorized person (owner, partner, corporate officer, or fiduciary) signs and includes their title and a daytime phone number.

Common Form 940 Challenges and How to Avoid Them

Strategic Filing & Payment Methods

Payment Methods

FUTA tax deposits must be made by Electronic Funds Transfer (EFT). Options include:

• EFTPS (Electronic Federal Tax Payment System): A free service provided by the Department of the Treasury.

• IRS Direct Pay.

• IRS Business Tax Account.

• EFW (Electronic Funds Withdrawal): If filing Form 940 electronically, you can pay the balance due in a single step.

Note: If your final balance due (Line 14) is \$500 or less, you may pay by check/money order with the return using Form 940-V.However, using EFT is still encouraged.

Filing an Amended Return

You use the current year's Form 940 (2025 Form 940 to amend a 2025 return).

1. Check Box 1a (Amended) in the Type of Return section.

2. Fill in all the amounts that should have been on the original form.

3. Sign the form.

4. Attach an explanation telling the IRS why you are amending (e.g., claiming credit for tax paid late to a state unemployment fund).

5. File the amended return using the "Without a payment" address.

Your Next Steps for Confident Form 940 Filing

Filing Form 940 correctly and punctually helps your startup avoid penalties while meeting essential employer obligations. With proactive planning and trusted support, it's a straightforward task in your financial operations scope.

Here’s your checklist:

• Review your total wages and identify FUTA-eligible compensation

• Ensure SUI taxes were paid accurately and on time to claim maximum credits

• Prepare and file your Form 940 using a reliable professional or software provider

For detailed guidance straight from the IRS, review the IRS FUTA information page.

FAQs

What is a "Credit Reduction State"?

A Credit Reduction State is one that has not repaid money borrowed from the federal government to pay unemployment benefits. If you paid wages in such a state, your maximum FUTA tax credit will be reduced, meaning you must pay additional FUTA tax, which is calculated using Schedule A (Form 940).

How do I report FUTA tax if I only pay household employees?

Generally, employers of household employees file Schedule H (Form 1040) instead of Form 940. However, if you also have other business employees, you can choose to include your household employees on Form 940.

If I'm a new business, do I have to enroll in EFTPS?

The IRS generally pre-enrolls new businesses in EFTPS when you apply for an EIN. Follow the instructions in your EIN package to activate your enrollment.