Employers use Form 940 to report and pay their annual Federal Unemployment Tax Act (FUTA) liability. FUTA is paid entirely by the employer, never withheld from employee paychecks, and it funds the federal share of unemployment benefits. The headline numbers are simple: 6.0% on the first $7,000 of wages you pay each employee, reduced to an effective 0.6% (about $42 per employee per year) once you claim the credit for state unemployment tax. The details around deposits, credit reduction states, and deadlines are where employers get tripped up.
Who Has to File
You owe FUTA tax, and must file Form 940, if you meet either test in the current or preceding calendar year. The wage test: you paid $1,500 or more in total wages during any single calendar quarter. The employment test: you had at least one employee for some part of a day in 20 or more different calendar weeks.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements Meeting just one is enough.
Two categories of employer use different thresholds. Household employers become liable at $1,000 in cash wages in any calendar quarter.2Internal Revenue Service. Publication 926 – Household Employer’s Tax Guide Agricultural employers become liable at $20,000 in cash wages in any quarter, or 10 or more farmworkers in 20 or more different weeks. Payments to independent contractors are not counted, because contractors are not employees for FUTA purposes.3Office of the Law Revision Counsel. 26 U.S. Code 3306 – Definitions
How Much You Owe
FUTA applies only to the first $7,000 of wages you pay to each employee during the calendar year. Anything above that per-employee cap is exempt. So your maximum gross FUTA obligation per employee is $420 (6.0% × $7,000) before any credit.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements
The $7,000 base covers salaries, hourly pay, commissions, bonuses, and the cash value of other compensation. Federal law excludes several kinds of payments from the FUTA definition of wages, including employer contributions to qualified retirement plans, employer-funded sickness or disability plans, dependent care assistance up to the statutory limit, and group-term life insurance coverage.3Office of the Law Revision Counsel. 26 U.S. Code 3306 – Definitions
Track each employee’s year-to-date wages. Once someone crosses $7,000 in cumulative pay, you stop accruing FUTA liability on that employee for the rest of the year. If you acquired another business and kept some of its employees, you may be able to count wages the predecessor already paid toward the $7,000 cap, but only if the predecessor was itself required to file Form 940.4Internal Revenue Service. Instructions for Form 940 (2025)
The State Credit That Brings 6.0% Down to 0.6%
The statutory rate is 6.0%, but almost no employer actually pays that. You get a credit of up to 5.4% for paying your state unemployment tax on time, which drops the effective federal rate to 0.6%.5Internal Revenue Service. FUTA Credit Reduction6Department of Labor, Employment and Training Administration. Unemployment Insurance Tax Fact Sheet The full 5.4% credit requires that you pay all required state unemployment contributions by the Form 940 due date. Late state payments cut your federal credit, which raises your federal bill. A missed SUTA deadline quietly costs you on the federal side.
Credit Reduction States
The 0.6% effective rate rises if you operate in a state that has borrowed from the federal government to pay unemployment benefits and hasn’t repaid on time. When a state carries an outstanding federal loan on January 1 for two consecutive years and doesn’t repay it by November 10 of the second year, the IRS reduces the FUTA credit available to employers there.5Internal Revenue Service. FUTA Credit Reduction
The reduction starts at 0.3% in the first year and grows by another 0.3% for each additional year the loan sits unpaid. A 0.3% reduction leaves you with a 5.1% credit, pushing the effective FUTA rate to 0.9%. The IRS publishes the final list of credit reduction states each November. If you paid wages in one of them, complete Schedule A (Form 940) and report the additional tax on line 11.5Internal Revenue Service. FUTA Credit Reduction
A Worked Example
Suppose you have five employees, each earning well over $7,000 during the year, and your state has no credit reduction:
- Taxable wages per employee: $7,000
- Total FUTA taxable wages: $7,000 × 5 = $35,000
- Gross FUTA at 6.0%: $2,100
- State credit at 5.4%: $1,890
- Net FUTA owed: $210, or $42 per employee
Same employer in a state with a 0.3% credit reduction: the credit falls to 5.1%, the effective rate becomes 0.9%, and the net bill is $315, or $63 per employee. If an employee only earned $5,000 for the year, you’d use $5,000 rather than $7,000 as that employee’s FUTA taxable wages. The cap applies only once an employee actually reaches it.
Depositing FUTA Tax During the Year
Form 940 is annual, but the tax often gets deposited quarterly. At the end of each calendar quarter, check your cumulative FUTA liability for the year. If it exceeds $500, deposit the full accumulated amount by the last day of the month after that quarter ends.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements
- Q1 (January–March): deposit by April 30
- Q2 (April–June): deposit by July 31
- Q3 (July–September): deposit by October 31
- Q4 (October–December): deposit by January 31 of the following year
If your accumulated liability stays at $500 or less through the first three quarters, you can carry the balance forward and pay it when you file the annual return. Many small employers end up making a single payment at year-end for exactly this reason.
All FUTA deposits must be made electronically. You can use the Electronic Federal Tax Payment System (EFTPS), your IRS business tax account, or IRS Direct Pay for businesses.1Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements Paper checks aren’t an option. Missing a deposit deadline triggers penalties even if the annual return is filed on time.
Filing the Annual Return
Form 940 reconciles your full-year FUTA liability against what you’ve already deposited. Report total wages paid, subtract amounts over the $7,000 per-employee cap and any exempt payments, apply the net rate (0.6%, or higher for credit reduction states), and compare against your deposits.
The standard due date is January 31 of the year after the tax year. When that falls on a weekend or holiday, the deadline shifts to the next business day. For the 2025 tax year, the due date is February 2, 2026, because January 31 is a Saturday. If you deposited all of your FUTA tax on time throughout the year, you get an automatic extension to February 10, 2026.4Internal Revenue Service. Instructions for Form 940 (2025) Any balance still owed after applying your deposits is due by the filing deadline. If you overpaid, you can claim a refund or apply the overpayment to next year.
If you paid state unemployment tax in more than one state during the year, or paid wages in a credit reduction state, complete Schedule A (Form 940) and attach it to your return. Schedule A allocates FUTA taxable wages across states and drives the additional tax calculation on line 11.4Internal Revenue Service. Instructions for Form 940 (2025) Most employers can file electronically through IRS-approved payroll software or file a paper return by mail.7Internal Revenue Service. 2025 Instructions for Form 940
Penalties If You Miss a Deadline
Late deposits, late filing, and late payment each carry their own penalty, and they can stack.
Failure-to-deposit penalties scale by how far past the deadline you are:8Internal Revenue Service. Failure to Deposit Penalty
- 1 to 5 calendar days late: 2% of the unpaid deposit
- 6 to 15 days late: 5%
- 16 or more days late: 10%
- More than 10 days after an IRS notice demanding payment: 15%
These tiers replace each other rather than stacking. A deposit 20 days late incurs a 10% penalty, not 2% plus 5% plus 10%.
File the return late and the failure-to-file penalty is 5% of the unpaid tax for each month or partial month the return is overdue, capped at 25%.9Internal Revenue Service. Failure to File Penalty A separate failure-to-pay penalty of 0.5% per month applies to any unpaid balance after the due date, also capped at 25%.10Internal Revenue Service. Failure to Pay Penalty Interest accrues on top at the federal short-term rate plus three percentage points, adjusted quarterly.11Internal Revenue Service. Quarterly Interest Rates The dollars involved with FUTA are usually modest, but the penalties are entirely avoidable with calendar reminders for the quarterly deposit dates and on-time state unemployment payments.
Correcting a Return You Already Filed
Form 940 has no dedicated correction form. To amend, file a fresh Form 940 with the “Amended Return” box checked in the upper-right corner, complete the whole form with the corrected figures, and submit it electronically or on paper.12Internal Revenue Service. Correcting Employment Taxes
If the correction shows an overpayment and you want a refund, the deadline is the later of three years from when you filed the original return or two years from when you paid the tax.13Internal Revenue Service. Time You Can Claim a Credit or Refund Miss that window and the overpayment is gone, so file the amended return promptly once you spot an error.