Use Form 940 to report your annual Federal Unemployment Tax Act (FUTA) tax. Together with state unemployment tax systems, the FUTA tax provides funds for paying unemployment compensation to workers who have lost their jobs. Most employers pay both a federal and a state unemployment tax. Only employers pay FUTA tax. Do not collect or deduct FUTA tax from your employees' wages.

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

These instructions give you some background information about the Form 940. They tell you who must file the form, how to fill it out line by line, and when and where to file it.

Except as noted below, if you answer “Yes” to either one of these questions, you must file Form 940:

If your business was sold or transferred during the year, each employer who answered “Yes” to at least one question above must file Form 940. However, do not include any wages paid by the predecessor employer on your Form 940 unless you are a successor employer. For details, see b. Successor employer under Type of Return on page 5.

If you received a preprinted Form 940 and are not liable for FUTA tax for 2006 because you made no payments to employees in 2006, check box c in the top right corner of the form. Then go to Part 7, sign the form, and file it with the IRS.

If you will not be liable for filing Form 940 in the future because your business has closed or because you stopped paying wages, check box d in the top right corner of the form. See d. Final... under Type of Return on page 5 for more information.