Form 940: Employer's Annual Federal Unemployment (FUTA) Tax Return

Form 940 is the yearly return for the Federal Unemployment Tax Act (FUTA). With state unemployment systems, FUTA pays benefits to workers who lose their jobs. Only the employer pays it. You never take it out of an employee's wages.

You file if either IRS test is a yes. Did you pay wages of $1,500 or more in any calendar quarter of this year or last? Did you have an employee for part of a day in 20 or more different weeks of this year or last? Part-time and temporary workers count. A partnership's partners don't.

Household employers generally use Schedule H instead. Section 501(c)(3) organizations and state and local governments are generally exempt. If you paid no wages, check box c and sign. If you closed the business or stopped paying wages, check box d and attach a statement naming who keeps the payroll records.

Form 940 reports one tax, FUTA, once a year. Form 941 reports withheld income tax plus both shares of Social Security and Medicare, every quarter.

Filing one doesn't cover the other, and the wages differ because Form 940 stops counting pay at $7,000. Pub. 15 calls withheld income tax and the employee's Social Security and Medicare tax trust fund taxes. FUTA is employer-only, so it isn't one. The Form 941 page covers the quarterly return.

The 2026 FUTA rate is 6.0% on the first $7,000 you pay each employee in the calendar year. Most employers get a credit of up to 5.4% for state unemployment tax paid, which leaves a net 0.6%, or $42 per employee.

The full credit has conditions. You must pay your state in full, on time (by the Form 940 due date) and on the same wages FUTA taxes, and your state can't be a credit reduction state. A late state payment shrinks the credit, which the line 10 worksheet works out. A state experience rate below 5.4% earns an additional credit, so a low state rate doesn't raise your federal bill.

Some states exclude wages FUTA still taxes, such as officer pay. With no state tax to credit, the full 6.0% can apply (line 9). Other payments are exempt and come off on line 4: employer health plan contributions, dependent care payments up to $7,500 per employee for 2026 ($5,000 for 2025), workers' compensation benefits, and pay for services by your parent, spouse or child under 21. Tips of $20 or more a month that employees report to you are wages.

Form 940 is due on the last day of the month after the year ends, or the next business day when that falls on a weekend or legal holiday. Deposit all your FUTA tax on time and you get until the 10th.

The 2026 dates apply the weekend rule from the instructions, because January 31, 2027 is a Sunday. On October 19, 2026 the posted form and instructions were still the 2025 set, last reviewed by the IRS on April 30, 2026. The instructions offer no extension of time to file, so the 10 days are earned, not requested. Your state unemployment credit depends on paying the state by the same date. The filing calendar lists payroll dates beside income tax dates.

A credit reduction state borrowed from the federal government to pay unemployment benefits and hasn't repaid it. Employers in a state with an outstanding balance on January 1 of two or more years in a row lose part of the 5.4% credit unless the state repays before November 10 of the tax year. The Department of Labor decides which states qualify, so the 2026 list isn't final yet.

The figures come from DOL's FUTA credit reduction page, updated September 11, 2026, and its tables. Schedule A (Form 940) works out the reduction on wages subject to that state's unemployment tax, and the total goes on line 11. For one California employee paid $7,000 or more, 2025 added $84 ($7,000 x 1.2%). At the potential 2026 rate it would add $371 ($7,000 x 5.3%). The amount is deposited with the fourth quarter.

Figure each quarter's FUTA liability as 0.6% of the first $7,000 paid to each employee. If the running total, including anything carried over, is $500 or less at quarter end, carry it forward. Once it's over $500, deposit by the last day of the month after the quarter ends.

Deposits go by EFT through EFTPS, IRS Direct Pay or your IRS business tax account, or through a provider that makes them for you. In the fourth quarter, an amount over $500 is due by the Form 940 due date, and $500 or less can be deposited or paid with the return. In a credit reduction year, that extra liability is a fourth-quarter amount. If a payroll platform makes your deposits, the employer still carries the responsibility when one is missed.

The return is two pages and mostly arithmetic from your payroll register. Part 2 builds taxable wages, Part 3 holds adjustments, Part 4 gives the balance due, and Part 5 shows liability by quarter when line 12 is over $500.

Illustrative example, made-up numbers. A small contractor pays six employees $182,000 in the year, including $12,000 of exempt health plan contributions.

Five employees reach the $7,000 base and one part-timer doesn't, so $182,000 of pay becomes $37,000 of taxable wages. With no credit reduction, line 12 is $222, under $500, so no deposits were needed and line 14 is paid with the return.

Put the same payroll in California. At the 2025 final rate, line 11 is $37,000 x 1.2% = $444 and line 12 is $666. At DOL's potential 2026 rate, line 11 is $37,000 x 5.3% = $1,961 and line 12 is $2,183. Both are over $500, so Part 5 is required and the credit reduction sits in the fourth quarter. Line 17 must equal line 12.

Failure to file adds 5% of the unpaid tax for each month or part of a month, up to 25%. Failure to pay adds 0.5% a month, also up to 25%. When both apply, the first is reduced by the second, so together they run at 5% a month. Interest runs from the due date. Pub. 15 says none applies if you show reasonable cause. Dispute an assessed penalty on Form 843, not on Form 940.

Deposits are separate. The Form 940 instructions say a deposit not made as required may draw a penalty, and they point to Pub. 15 sections 11 and 12. Its tier table (2%, 5%, 10% and 15%) is written for Form 941, 943, 944 and 945 deposits, so don't assume those percentages for FUTA. The notice will state the amount.

Illustrative example. The California employer above owes $666 and files three months late. The combined penalty is 15% of $666, or $99.90, before interest. FUTA isn't a trust fund tax, so the trust fund recovery penalty isn't the risk here.

The employer signs Part 7. Who signs depends on the entity: the owner of a sole proprietorship; an authorized partner, member or officer of a partnership; a principal officer of a corporation; the owner or authorized principal officer of a disregarded single-member LLC; the fiduciary of a trust or estate. A duly authorized agent can sign under a power of attorney or Form 8655.

A paid preparer who isn't your employee signs the preparer section with a PTIN. A reporting agent with Form 8655 generally leaves it blank. A Part 6 third-party designee can discuss the form with the IRS for a year after the due date but can't bind you, and Pub. 947 covers wider authority. You remain responsible for the return and the deposits when a third party handles them.

Finbryn doesn't file Form 940, sign it or make FUTA deposits. The employer signs, and your payroll provider or you file. What Finbryn does sits in the books.

When payroll runs on a platform such as Gusto, ADP, Rippling or Deel, each pay run is recorded in your accounting software, with FUTA expense and liability kept apart from state unemployment accounts and reconciled to the platform's deposits. Each quarter the running total is checked against the $500 rule, so a deposit due November 2 isn't a surprise.

Before the return goes out, Finbryn prepares a workpaper that follows the lines above: payments from the payroll register, exempt payments by type, the $7,000 base applied employee by employee, state unemployment paid and when, and wages in credit reduction states. You or your payroll provider use it to review the return. If an IRS notice arrives, representation goes to an enrolled agent or CPA you authorize, and Finbryn prepares the workpapers behind the response. See payroll journals and reconciliations.

These are easy to get wrong, and each one changes the number on the return.

• Paying state unemployment tax late. The 5.4% credit depends on paying the state by the Form 940 due date.
• Using the state wage base as the federal one. FUTA stops at $7,000 even where the state taxes more.
• Missing wages the state excludes. They can carry the full 6.0%.
• Forgetting the credit reduction deposit. It belongs to the fourth quarter, and a 0.6% estimate won't include it.
• Skipping Schedule A in a multi-state year.
• Reading the 10-day rule as an extension. You earn it only with on-time deposits.
• Leaving out a misclassified worker. A person treated as a contractor who is really an employee never reached the return. The Form 1099 guide covers the contractor side.

The 2025 instructions, reviewed April 30, 2026, add a section where aggregate return filers such as certified professional employer organizations identify themselves. The IRS now issues refunds by direct deposit, though you can still apply an overpayment to the next return on line 15b, and balance due payments are to be made electronically.

For 2026, the rate and the $7,000 base are unchanged. The credit reduction estimates above are higher and become final after November 10, 2026. The instructions also say the moving expense and bicycle commuting exclusions were suspended through 2025 and that P.L. 119-21 eliminates them permanently after 2025.