Form 940 reports your annual Federal Unemployment Tax Act (FUTA) tax. The gross rate is 6.0% on the first $7,000 of each employee's wages, but a 5.4% credit reduces the effective rate to 0.6% for most employers — just $42 per employee per year.
- Filed annually by January 31 (extended to Feb 10 if all deposits are timely)
- Employer-only tax — never withheld from employees
- Deposit quarterly via EFTPS if liability exceeds $500
What Is FUTA and Form 940?
The Federal Unemployment Tax Act (FUTA) funds unemployment benefits through a joint federal-state system. Unlike FICA taxes, FUTA is paid entirely by the employer — it is never deducted from employee wages.
Form 940 is the annual return where employers calculate their FUTA liability, account for any state unemployment tax credits, and reconcile deposits made during the year. It is filed once per year by January 31, covering the prior calendar year.
Who Must File Form 940?
You must file Form 940 if either of these conditions applies:
Household employers report FUTA on Schedule H (with Form 1040) instead of Form 940. Agricultural employers use Form 943. Only businesses use Form 940.
FUTA Tax Rate and Credit
The FUTA tax calculation involves a gross rate, a credit for state unemployment taxes paid, and a wage base:
| Component | Amount | Notes |
|---|---|---|
| Gross FUTA rate | 6.0% | Set by federal law |
| State credit | Up to 5.4% | For timely SUTA payments |
| Net FUTA rate | 0.6% | For most employers |
| FUTA wage base | $7,000 | Per employee per year |
| Max tax per employee | $42 | $7,000 × 0.6% |
The 5.4% credit is available to employers who pay their state unemployment taxes (SUTA) on time and in full. If your state is a credit reduction state, the credit is reduced.
Credit Reduction States
When a state borrows from the federal unemployment trust fund to pay benefits and does not repay within two years, it becomes a credit reduction state. Employers in these states receive a smaller FUTA credit, resulting in a higher effective tax rate.
Credit reduction states change each year. The IRS publishes the list in November for the current tax year. The credit reduction amount is typically 0.3% per year the debt remains unpaid, added to Schedule A of Form 940.
Deposit Rules
FUTA deposits are made quarterly based on cumulative liability:
| Quarter End | Deposit Due If Liability > $500 |
|---|---|
| March 31 | April 30 |
| June 30 | July 31 |
| September 30 | October 31 |
| December 31 | January 31 (with Form 940) |
If your cumulative FUTA liability is $500 or less at the end of a quarter, do not make a deposit. Instead, carry the amount forward to the next quarter. If the total is still $500 or less at year-end, you can pay it with your Form 940 filing.
Frequently Asked Questions
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