Form 940 and FUTA tax The federal unemployment return, once a year

What FUTA is

FUTA is the Federal Unemployment Tax Act. It is an employer tax. You do not take it out of the worker’s check. It never shows up as a deduction on a pay stub.

Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return. You file it once a year. It is separate from Form 941, the quarterly return for income tax withholding, Social Security, and Medicare. Form 941 covers that one.

Who must file Form 940

The IRS Instructions for Form 940 give two tests for most employers. The current edition is for 2025 returns. You file if either answer is yes:

• Did you pay wages of $1,500 or more to employees in any calendar quarter of this year or last year?
• Did you have at least one employee for some part of a day in 20 or more different weeks this year or last year?

Partners in a partnership are not counted. One part-time worker on the payroll for 20 different weeks is enough to meet the second test.

Two kinds of employer use other tests.

• Household employers count cash wages of $1,000 or more in any quarter. A family that employs a nanny generally reports FUTA on Schedule H with the personal return, not on Form 940.
• Farm employers count $20,000 or more in cash wages to farmworkers in any quarter, or 10 or more farmworkers in 20 or more weeks.

The instructions say government employers and most 501(c)(3) charities are generally exempt.

The FUTA rate, and the 5.4 percent credit

The instructions set FUTA at 6.0 percent of the first $7,000 you pay each employee in the year. Wages above $7,000 for that person are not taxed.

Most employers do not pay the full 6.0 percent. The instructions say most employers get a credit of up to 5.4 percent for state unemployment tax. Pay your state unemployment tax in full and on time, and the credit takes the rate down to 0.6 percent.

The math: $7,000 times 0.6 percent is $42. $7,000 times 6.0 percent is $420. A business with five workers who each earn more than $7,000 owes at most $210 in FUTA for the year with the full credit.

Some pay is left out of FUTA wages. The instructions list certain fringe benefits, retirement plan contributions, and dependent care payments. Pay to your parent, your spouse, or your child under 21 is also exempt from FUTA.

Credit reduction states

A state that borrowed from the federal government to pay unemployment benefits, and has not paid it back, can lose part of the credit. The IRS calls it a credit reduction state. Employers there pay more FUTA.

The IRS credit reduction page says the cut is 0.3 percent in the first year a state is on the list, another 0.3 percent in the second year, and another 0.3 percent each year after that while the loan stays unpaid.

The list is not final until late in the year. The DOL credit reduction page says the final reduction for a year is not set until November 10 of that year. The DOL page posts the historical list and the potential states for 2026. If you paid wages in a credit reduction state, you figure the extra tax on Schedule A of Form 940, and the instructions say to add it to your fourth-quarter deposit.

When you deposit FUTA

FUTA is filed once a year, but it can be paid during the year. The instructions set a $500 rule.

1. Figure the FUTA you owe at the end of each quarter.
2. If it is more than $500, counting any amount carried in from earlier quarters, deposit it by the last day of the month after the quarter: April 30, July 31, October 31, or January 31.
3. If it is $500 or less, carry it to the next quarter.
4. If the fourth quarter total is still $500 or less, you can pay it with Form 940.

The instructions say all federal tax deposits must be made by electronic funds transfer.

A small employer often never crosses $500 in a quarter. At 0.6 percent, $500 of FUTA is about $83,000 in FUTA wages, and each worker counts only up to $7,000. You would need about 12 workers at the $7,000 cap before one quarter crosses the line.

A worked example

Say you have three employees in one state and pay your state unemployment tax on time. These figures are an example you can redo.

• Worker A earns $30,000 in the year. FUTA wages are $7,000.
• Worker B earns $12,000. FUTA wages are $7,000.
• Worker C starts in October and earns $4,000. FUTA wages are $4,000.

Total FUTA wages are $18,000. At 0.6 percent, FUTA for the year is $108. Worker A passes $7,000 in the first quarter and Worker B in the third, so the tax is spread over the first three quarters and a little of the fourth. No quarter reaches $500, so you carry it forward and may pay the $108 with Form 940.

Without the state credit, the same $18,000 at 6.0 percent would be $1,080. That is why paying the state on time matters.

When Form 940 is due

Form 940 is due January 31 for the year before, moved to the next business day when that date falls on a weekend or holiday. The current instructions, for 2025 returns, set February 2, 2026, because January 31, 2026 was a Saturday. If you deposited all your FUTA on time, you have until February 10.

For 2026 returns, January 31, 2027 is a Sunday. Check the 2026 instructions when the IRS posts them for the exact date.

How to file

The IRS encourages electronic filing through its e-file system. A fee may apply. Payroll software and tax professionals file Form 940 this way. You can also mail it to the address the instructions list for your state.

Schedule A goes with Form 940 if you paid wages in more than one state, or in a credit reduction state. Schedule R is for agents and professional employer organizations that file for many clients. A small business filing for itself does not use it.

The state side of the same tax

FUTA works because of the state account. The 5.4 percent credit is for state unemployment tax paid on time. Miss the state payment, and the federal bill goes up.

The state rate and wage base are not the federal ones. Texas taxes the first $9,000 of each worker’s wages. Illinois sets $14,250 for 2026. New York sets $17,600 for 2026. Washington sets $78,200 for 2026. Oregon sets $56,700 for 2026. Each state page cites its agency for those figures and the new-employer rate. California covers the 15-day clock to register with the state.

Employer payroll taxes percentage adds FUTA to your share of Social Security and Medicare, with a sample you can redo. Can I do my own payroll? places Form 940 in the year’s calendar.

The methodology page grades how much of the state paperwork software takes off your desk. Gusto is one plain link. Patriot is the other service on this site.