Guides
Form 940 Explained: The Employer’s Annual FUTA Return
Form 940 is the return employers file once a year to report and pay federal unemployment (FUTA) tax. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee, but most employers claim a 5.4% credit for state unemployment taxes paid on time, which drops the effective rate to 0.6% (about $42 per employee per year). The 2025 return is due February 2, 2026. Employers, not workers, pay this tax.
FUTA funds the federal side of the unemployment insurance system, which pays benefits to workers who lose their jobs. Form 940 reconciles the full-year FUTA liability against what you already deposited during the year. It is separate from the payroll tax you report on Form 941.
Who Must File Form 940
You must file Form 940 if you meet either of two tests during the current or prior calendar year. Test one: you paid $1,500 or more in wages to employees in any calendar quarter. Test two: you had one or more employees for at least part of a day in any 20 or more different weeks. Household and agricultural employers use different thresholds.
Most businesses with W-2 employees cross one of these lines quickly, so filing Form 940 is the norm rather than the exception. Independent contractors do not count toward these tests, because contractor pay is not FUTA wages. If you are unsure whether a worker is an employee, the classification drives which payroll filings apply. See our guide on the tax difference between employees and independent contractors.
You file one Form 940 per employer identification number (EIN), covering all employees under that EIN for the full calendar year.
The FUTA Rate: 6.0%, the $7,000 Wage Base, and the 5.4% Credit
The statutory FUTA rate is 6.0%, applied only to the first $7,000 of wages you pay each employee during the year. Wages above $7,000 per employee are not subject to FUTA. If you pay your state unemployment tax (SUTA) in full and on time, you claim a credit of up to 5.4%, cutting the effective FUTA rate to 0.6%.
At 0.6% on a $7,000 wage base, the maximum FUTA cost is $42 per employee per year for most employers. The credit is the reason the headline 6.0% rate rarely applies in practice.
| Item | Amount |
|---|---|
| Statutory FUTA rate | 6.0% |
| FUTA wage base (per employee) | First $7,000 of annual wages |
| Maximum state credit | 5.4% |
| Effective rate with full credit | 0.6% |
| Max FUTA per employee (with credit) | $42 per year |
| Max FUTA per employee (no credit) | $420 per year |
To earn the full 5.4% credit, you must pay your state unemployment contributions by the Form 940 due date, and the state must not be a credit reduction state. Late or partial state payments can reduce the credit and raise your federal FUTA bill.
Credit Reduction States: When the 0.6% Rate Goes Up
A credit reduction state is one that borrowed from the federal government to pay unemployment benefits and did not repay the loan on schedule. When a state carries an outstanding federal loan balance on January 1 for two consecutive years and fails to repay by November 10 of the second year, employers in that state lose part of the 5.4% credit. The reduction starts at 0.3% and grows by 0.3% for each additional year the loan goes unpaid.
The lost credit is added on top of the 0.6% base, so the effective rate rises. The extra liability is treated as incurred in the fourth quarter and is due with the return by January 31.
For the 2025 tax year, only two jurisdictions were credit reduction states:
| Jurisdiction | 2025 credit reduction | Effective FUTA rate | Extra FUTA per employee |
|---|---|---|---|
| California | 1.2% | 1.8% (0.6% + 1.2%) | +$84 (up to $126 total) |
| U.S. Virgin Islands | 4.5% | 5.1% (0.6% + 4.5%) | +$315 (up to $357 total) |
Connecticut, Illinois, and New York repaid their advances before the November 10, 2025 cutoff and were not credit reduction states for 2025. Because the list changes yearly, check IRS Schedule A (Form 940) for the current year before filing. If you paid wages in a credit reduction state, you check the box on line 2 and complete Schedule A.
Deadlines and Deposit Rules
Form 940 is filed annually. The 2025 return is due February 2, 2026 (January 31 falls on a weekend, so the deadline shifts to the next business day). If you deposited all FUTA tax when it was due during the year, you get an extended filing deadline of February 10, 2026.
Depositing FUTA is separate from filing. You track FUTA liability each quarter and deposit when the accumulated amount crosses a threshold:
- Calculate your FUTA liability at the end of each quarter (March 31, June 30, September 30, December 31).
- If the total undeposited liability is more than $500, deposit it by the last day of the month after the quarter ends.
- If it is $500 or less, carry it forward and add it to the next quarter.
- If your total FUTA for the year stays at or under $500, you can pay it all with Form 940 instead of making deposits.
FUTA deposits are made electronically through EFTPS. Estimated payment mechanics for businesses can vary by situation; see our overview of estimated tax payments for how deposit timing interacts with cash flow.
Form 940 vs Form 941: How They Differ
Form 940 and Form 941 are both employer payroll filings, but they report different taxes on different schedules. Form 940 reports annual FUTA tax, paid entirely by the employer. Form 941 reports quarterly federal income tax withholding plus Social Security and Medicare (FICA), which are shared between employer and employee. Most employers file both.
| Feature | Form 940 | Form 941 |
|---|---|---|
| Tax reported | FUTA (federal unemployment) | Income tax withholding + Social Security + Medicare |
| Who pays | Employer only | Employer and employee (FICA); employee (withholding) |
| Frequency | Annual | Quarterly |
| Deadline | January 31 (Feb 2, 2026 for 2025) | Last day after each quarter: Apr 30, Jul 31, Oct 31, Jan 31 |
| Wage base | First $7,000 per employee | $184,500 Social Security cap (2026); no Medicare cap |
| Typical rate | 0.6% effective | 15.3% combined FICA + withholding |
The wages are not mutually exclusive: the same paycheck can generate FUTA (Form 940), FICA, and withholding (Form 941). For the quarterly filing in detail, see our breakdown of Form 941, the employer’s quarterly payroll tax return. Businesses reporting withholding should also confirm their setup with tax withholding done right.
Frequently Asked Questions
What is the FUTA tax rate for 2026?
The statutory FUTA rate is 6.0% on the first $7,000 of each employee’s annual wages. Employers who pay state unemployment taxes in full and on time claim a 5.4% credit, lowering the effective rate to 0.6%, or about $42 per employee per year. Employers in credit reduction states pay more because part of that 5.4% credit is disallowed.
When is Form 940 due?
Form 940 is due January 31 following the tax year. For the 2025 tax year, the deadline is February 2, 2026, because January 31 falls on a weekend. If you deposited all your FUTA tax on time during the year, the IRS gives you until February 10, 2026 to file the return itself.
Do employees pay FUTA tax?
No. FUTA is paid entirely by the employer. You cannot withhold FUTA from an employee’s paycheck or deduct it from wages. This differs from the Social Security and Medicare taxes on Form 941, which are split between employer and employee, and from income tax withholding, which comes out of employee pay.
What is a FUTA credit reduction state?
A credit reduction state borrowed from the federal government to pay unemployment benefits and did not repay on time. Employers there lose part of the 5.4% state credit, starting at 0.3% and rising 0.3% per additional year. For 2025, California (1.2%) and the U.S. Virgin Islands (4.5%) were credit reduction states, raising their effective FUTA rates to 1.8% and 5.1%.
Do I have to file both Form 940 and Form 941?
In most cases, yes. If you have W-2 employees and meet the filing tests, you file Form 941 quarterly for income tax withholding and FICA, and Form 940 annually for FUTA. They report different taxes, so filing one does not satisfy the other. Some small employers file Form 944 instead of 941, but Form 940 still applies.
How much is FUTA tax per employee?
For most employers claiming the full 5.4% credit, FUTA costs 0.6% of the first $7,000 in wages, a maximum of $42 per employee per year. Without the credit, the cost can reach 6.0%, or $420 per employee. In credit reduction states the amount lands between those figures, depending on the reduction rate for that year.
What happens if I do not file Form 940 on time?
Late filing and late payment can trigger IRS penalties plus interest on the unpaid FUTA. Penalty amounts depend on how late the return is and how much tax is owed. Paying state unemployment taxes late can also cost you part of the 5.4% credit, which raises your federal FUTA liability even if the Form 940 itself is filed on time.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.