IRS Form 940 is used by employers to report their annual Federal Unemployment Tax Act tax. This tax, along with additional state taxes, pays for unemployment compensation funding for employees who lose their jobs.
FUTA taxes are paid for directly by employers and cannot be deducted from paychecks or otherwise collected from employees. As of 2014, employers must pay this tax if they paid an employee wage of at least $1,500 in any calendar quarter of 2013 and 2014. It is also required if the employers were assisted by one or more workers for at least part of a day in 20 or more distinct weeks in 2013 or 2014. All temporary, full-time and part-time employees must be counted when figuring this tax, though partners in a business don't count in terms of taxation.
The FUTA tax rate of 6 percent applies to the first $7,000 of wages paid to each employee per year, but many states have different wage bases used to figure state employment compensation taxes. When paying state unemployment tax, some businesses can receive a credit of up to 5.4 percent when filing Form 940, making the FUTA tax rate 0.6 percent as long as state taxes are paid on time and employers don't do business in a credit reduction state.