AccessibilitySkip to Top NavigationSkip to Main ContentHome  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Specific Instructions

Table of Contents

Part 1:Tell Us About Your Return

If any line in Part 1 does not apply, leave it blank.

1.If you were required to pay your state unemployment tax in …

1a. One state only . . .   
Enter the two-letter U.S. Postal Service abbreviation for the state where you were required to pay your tax on line 1a. For a list of state abbreviations, see the Instructions for Schedule A (Form 940) or visit the website for the U.S. Postal Service at www.usps.com.

1b. More than one state (you are a multi-state employer) . . .   Check the box on line 1b. Then fill out Part 1 of Schedule A (Form 940), and attach it to your Form 940.

2.If you paid wages in a state that is subject to credit reduction . . .

Skip line 2 and go to line 3 because the U.S. Department of Labor has announced that there are no credit reduction states for tax year 2007.

A state that has not repaid money it borrowed from the federal government to pay unemployment benefits is called a credit reduction state. The U.S. Department of Labor determines which states are credit reduction states.

If you paid wages that are subject to the unemployment tax laws of a credit reduction state, you may have to pay more FUTA tax when filing your Form 940.

Part 2:Determine Your FUTA Tax Before Adjustments for 2007

If any line in Part 2 does not apply, leave it blank.

3.Total payments to all employees

Report the total payments you made during the calendar year on line 3. Include payments for the services of all employees, even if the payments are not taxable for FUTA. Your method of payment does not determine whether payments are wages. You may have paid wages hourly, daily, weekly, monthly, or yearly. You may have paid wages for piecework or as a percentage of profits. Include:

  • Compensation, such as:

    — Salaries, wages, commissions, fees, bonuses, vacation allowances, and amounts you paid to full-time, part-time, or temporary employees.

  • Fringe benefits, such as:

    — Sick pay (including third-party sick pay if liability is transferred to the employer). For details on sick pay, see Pub. 15-A, Employer's Supplemental Tax Guide.
    —The value of goods, lodging, food, clothing, and non-cash fringe benefits.
    —Section 125 (cafeteria) plan benefits.

  • Retirement/Pension, such as:

    — Employer contributions to a 401(k) plan, payments to an Archer MSA, payments under adoption assistance programs, and contributions to SIMPLE retirement accounts (including elective salary reduction contributions).
    — Amounts deferred under a non-qualified deferred compensation plan.

  • Other payments, such as:

    — Tips of $20 or more in a month that your employees reported to you.
    — Payments made by a predecessor employer to the employees of a business you acquired.
    — Payments to nonemployees who are treated as your employees by the state unemployment tax agency.

For details on wages and other compensation, see section 5 of Pub. 15-A, Employer's Supplemental Tax Guide.

Example:

You had 3 employees. You paid $44,000 to Employee A, $8,000 to Employee B, and $16,000 to Employee C.
  $44,000 Amount paid to Employee A
  8,000 Amount paid to Employee B
+ 16,000 Amount paid to Employee C
  $68,000 Total payments to employees. You would enter this amount on line 3.

4.Payments exempt from FUTA tax

You only report a payment as exempt from FUTA tax on line 4 if you included the payment on line 3. If you enter an amount on line 4, check the appropriate box or boxes on lines 4a through 4e to show the types of payments exempt from FUTA tax.

Some payments are exempt from FUTA tax because the payments are not included in the definition of wages or the services are not included in the definition of employment. Payments exempt from FUTA tax may include:

  • Fringe benefits, such as:

    — The value of certain meals and lodging.
    — Contributions to accident or health plans for employees, including certain employer payments to a Health Savings Account or an Archer MSA.
    — Employer reimbursements (including payments to a third party) for qualified moving expenses, to the extent that these expenses would otherwise be deductible by the employee.
    — Payments for benefits excluded under section 125 (cafeteria) plans.

  • Group term life insurance.

    For information about group term life insurance and other payments for fringe benefits that may be exempt from FUTA tax, see Pub. 15-B, Employer's Tax Guide to Fringe Benefits.

  • Retirement/Pension, such as employer contributions to a qualified plan, including a SIMPLE retirement account (other than elective salary reduction contributions) and a 401(k) plan.

  • Dependent care, such as payments (up to $5,000 per employee, $2,500 if married filing separately) for a qualifying person's care that allows your employees to work and that would be excludable by the employee under section 129.

  • Other payments, such as:

    — All non-cash payments and certain cash payments for agricultural labor, and all payments to “H-2(A)” visa workers. See For agricultural employers on page 2 or get Pub. 51 (Circular A), Agricultural Employer's Tax Guide.
    — Payments made under a workers' compensation law because of a work-related injury or sickness. See section 6 of Pub. 15-A, Employer's Supplemental Tax Guide.
    — Payments for domestic services if you did not pay cash wages of $1,000 or more (for all domestic employees) in any calendar quarter in 2006 or 2007. See Pub. 926, Household Employer's Tax Guide.
    — Payments for services provided to you by your parent, spouse, or child under the age of 21. See section 3 of Pub. 15 (Circular E), Employer's Tax Guide.
    — Payments for certain fishing activities. See Pub. 595, Tax Highlights for Commercial Fishermen.
    — Payments to certain statutory employees. See section 1 of Pub. 15-A, Employer's Supplemental Tax Guide.
    — Payments to nonemployees who are treated as your employees by the state unemployment tax agency.

See section 3306 and its related regulations for more information about FUTA taxation of retirement plan contributions, dependent care payments, and other payments.

For more information on payments exempt from FUTA tax, see section 15 in Pub. 15 (Circular E) or section 15 in Pub. 51 (Circular A).

Example:

You had 3 employees. You paid $44,000 to Employee A including $2,000 in health insurance benefits. You paid $8,000 to Employee B, including $500 in retirement benefits. You paid $16,000 to Employee C, including $2,000 in health and retirement benefits.
  $ 2,000 Health insurance benefits for Employee A
  500 Retirement benefits for Employee B
  + 2,000 Health and retirement benefits for Employee C
  $4,500 Total payments exempt from FUTA tax. You would enter this amount on line 4 and check boxes 4a and 4c.

5.Total of payments made to each employee in excess of $7,000

Only the first $7,000 you paid to each employee in a calendar year is subject to FUTA tax. This $7,000 is called the FUTA wage base.

Enter on line 5 the total of the payments over $7,000 you paid to each employee during 2007 after subtracting any payments exempt from FUTA tax shown on line 4.

Following our example:

You had 3 employees. You paid $44,000 to Employee A, $8,000 to Employee B, and $16,000 to Employee C, including a total of $4,500 in payments exempt from FUTA tax for all 3 employees. (To determine the total payments made to each employee in excess of the FUTA wage base, the payments exempt from FUTA tax and the FUTA wage base must be subtracted from total payments. These amounts are shown in parentheses.)
           
Employees A B C
Total payments to employees $44,000 $8,000 $16,000
Payments exempt from
FUTA tax 		(2,000) (500) (2,000)
FUTA wage base (7,000) (7,000) (7,000)
      $35,000 $500 $7,000
  $35,000        
  500        
  + 7,000        
  $42,500 Total of payments made to each employee in excess of $7,000. You would enter this amount on line 5.

If you are a successor employer . . .   When you figure the payments made to each employee in excess of $7,000, you may include the payments that the predecessor made to the employees who continue to work for you only if the predecessor was an employer for FUTA tax purposes resulting in the predecessor being required to file Form 940.

  

Example for successor employers:

During the calendar year, the predecessor employer paid $5,000 to Employee A. You acquired the predecessor's business. After the acquisition, you employed Employee A and paid Employee A an additional $3,000 in wages. None of the amounts paid to Employee A were payments exempt from FUTA tax.
  $5,000 Wages paid by predecessor employer
  + 3,000 Wages paid by you
  $8,000 Total payments to Employee A. You would include this amount on line 3.
     
  $8,000 Total payments to Employee A
  - 7,000 FUTA wage base
  $1,000 Payments made to Employee A in excess of $7,000.
     
$1,000 Payments made to Employee A in excess of $7,000.
+ 5,000 Taxable FUTA wages paid by predecessor employer
$6,000 You would include this amount on line 5.

6. Subtotal

To figure your subtotal, add the amounts on lines 4 and 5 and enter the result on line 6.

    line 4  
  + line 5  
    line 6  

7. Total taxable FUTA wages

To figure your total taxable FUTA wages, subtract line 6 from line 3 and enter the result on line 7.

    line 3  
  - line 6  
    line 7  

8. FUTA tax before adjustments

To figure your total FUTA tax before adjustments, multiply line 7 by .008 and enter the result on line 8.

    line 7  
    x .008  
    line 8  

Part 3:Determine Your Adjustments

If any line in Part 3 does not apply, leave it blank.

9.If ALL of the FUTA wages you paid were excluded from state unemployment tax. . .

Multiply line 7 by .054 and enter the result on line 9.

    line 7  
    x .054  
    line 9  

If you were not required to pay state unemployment tax because all of the wages you paid were excluded from state unemployment tax, you must pay FUTA tax at the 6.2% (.062) rate. For example, if your state unemployment tax law excludes wages paid to corporate officers or employees in specific occupations, and the only wages you paid were to corporate officers or employees in those specific occupations, you must pay FUTA tax on those wages at the full FUTA rate of 6.2% (.062). When you figured the FUTA tax before adjustments on line 8, it was based on the maximum allowable credit (5.4%) for state unemployment tax payments. Because you did not pay state unemployment tax, you do not have a credit and must figure this adjustment.

If line 9 applies to you, lines 10 and 11 do not apply to you.   Therefore, leave lines 10 and 11 blank. Do not fill out the worksheet in the instructions or Part 2, Schedule A (Form 940).

10.If SOME of the taxable FUTA wages you paid were excluded from state unemployment tax, OR you paid ANY state unemployment tax late

Fill out the worksheet on the next page. The worksheet takes you step by step through the process of figuring your credit. On page 9, you'll find an example of how to use it. Do not complete the worksheet if line 9 applied to you (see instructions above).

Before you can properly fill out the worksheet, you will need to gather the following information:   

  • Taxable FUTA wages (from line 7 of Form 940),

  • Taxable state unemployment wages (state and federal wage bases may differ),

  • The experience rates assigned to you by the states where you paid wages,

  • The amount of state unemployment taxes you paid on time (On time means that you paid the state unemployment taxes by the due date for filing Form 940.), and

  • The amount of state unemployment taxes you paid late. (Late means after the due date for filing Form 940.)

    caution
    Do not include any penalties, interest, or unemployment taxes deducted from your employees' pay in the amount of state unemployment taxes. Also, do not include as state unemployment taxes any special administrative taxes or voluntary contributions you paid to get a lower assigned experience rate or any surcharges, excise taxes, or employment and training taxes. (These items are generally listed as separate items on the state's quarterly wage report.)

For line 3 of the worksheet:   

  • If any of the experience rates assigned to you were less than 5.4% for any part of the calendar year, you must list each assigned experience rate separately on the worksheet.

  • If you were assigned six or more experience rates that were less than 5.4% for any part of the calendar year, you must use another sheet to figure the additional credits and then include those additional credits in your line 3 total.

After you complete the worksheet, enter the amount from line 7 of the worksheet on line 10 of Form 940. Do not attach the worksheet to your Form 940. Keep it with your records.

Worksheet—Line 10

Before you begin:

Use this worksheet to figure your credit if:

  • some of the wages you paid were excluded from state unemployment tax, OR

  • you paid any state unemployment tax late.

For this worksheet, do not round your figures.
Before you can properly fill out this worksheet, you must gather this information:
  ■ Taxable FUTA wages (from line 7 of Form 940)
  ■ Taxable state unemployment wages
  ■ The experience rates assigned to you by the states where you paid wages
  ■ The amount of state unemployment taxes you paid on time. (On time means that you paid the state unemployment taxes by the due date for filing the Form 940.) Include any state unemployment taxes you paid on nonemployees who were treated as employees by your state unemployment agency.
  ■ The amount of state unemployment taxes you paid late. (Late means after the due date for filing Form 940.)
1. Maximum allowable credit — Enter line 7 from Form 940 here: . x .054 = line 1 1. .
                         
2. Credit for timely state unemployment tax payments — How much did you pay on time? 2. .
  • If line 2 is equal to or more than line 1, STOP here.
Stop reading here. This does not apply to you.
 You have completed the worksheet. Leave line 10 of Form 940 blank. 		   
  • If line 2 is less than line 1, continue this worksheet.    
3. Additional credit — Were ALL of your assigned experience rates 5.4% or more?    
  • If yes, enter zero on line 3. Then go to line 4 of this worksheet.    
  • If no, fill out the computations below. List ONLY THOSE STATES for which your assigned experience rate for any part of the calendar year was less than 5.4%.    
      State   Computation rate
The difference between 5.4% (.054) and your assigned experience rate
(.054 - .XXX (assigned experience rate) = computation rate) 		  Taxable state unemployment wages at assigned experience rate   Additional Credit    
    1.     . x . = .    
    2.     . x . = .    
    3.     . x . = .    
    4.     . x . = .    
    5.     . x . = .    
  If you need more lines, use another sheet and include those additional credits in the total. Total .    
  Enter the total on line 3    
                      3. .
4. Subtotal (Line 2 + line 3 = line 4) 4. .
  • If line 4 is equal to or more than line 1, STOP here.
Stop reading here. This does not apply to you.
 You have completed the worksheet. Leave line 10 of Form 940 blank. 		   
  • If line 4 is less than line 1, continue this worksheet.    
5. Credit for paying state unemployment taxes late:
  5a. What is your remaining allowable credit? (Line 1 - line 4 = line 5a) 5a. .    
  5b. How much state unemployment tax did you pay late? 5b. .    
5c. Which is smaller, line 5a or line 5b? Enter the smaller number here. 5c. .    
  5d. Your allowable credit for paying state unemployment taxes late (line 5c x .90 = line 5d) 5d. .
6. Your FUTA credit (line 4 + line 5d = line 6) 6. .
  • If line 6 is equal to or more than line 1, STOP here.
Stop reading here. This does not apply to you.
 You have completed the worksheet. Leave line 10 of Form 940 blank. 		   
  • If line 6 is less than line 1, continue this worksheet.
7. Your adjustment (Line 1 - line 6 = line 7) Enter line 7 on line 10 of Form 940. 7. .
Do not attach this worksheet to your Form 940. Keep it for your records.

Example for using the worksheet:

You had 3 employees, 2 of these employees were corporate officers whose wages were not subject to state unemployment tax in your state. The other employee's wages were subject to state unemployment tax. You paid some state unemployment tax on time, some late, and some remains unpaid.
Here are the records:  
Total taxable FUTA wages (line 7 of Form 940) $21,000.00
Taxable state unemployment wages $ 7,000.00
Experience rate for 2007 .041(4.1%)
State unemployment tax paid on time $100.00
State unemployment tax paid late $78.00
State unemployment tax not paid $109.00
1. Maximum allowable credit
    $21,000.00 (line 7 of Form 940)        
    x .054 (maximum credit rate)        
    $1,134.00       1. $1,134.00
               
2. Credit for timely state unemployment tax payments 2. $100.00
3. Additional credit     3.