Form 940 – FUTA Tax Return Filing Guide 2025

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A client with three employees in one state assumes their FUTA bill is the usual rounding error, about 0.6% on the first $7,000 of wages per worker, and budgets accordingly. Then their state shows up on the credit-reduction list, the 5.4% offset against the 6.0% statutory rate shrinks, and the per-employee cost that was supposed to be near $42 climbs. The math on Form 940 is small, but the surprise is not.

Form 940 reconciles your annual federal unemployment tax and is due February 2, 2026 for tax year 2025, or February 10, 2026 if every required deposit was timely. The piece that catches people is rarely the base calculation. It is the state credit-reduction list, published late each year, that quietly changes what you owe.

Key Takeaways

• Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return, filed once per year to reconcile unemployment tax obligations and claim state credit reductions.
• Who files: Any employer who paid wages of $1,500 or more in any calendar quarter, or had one or more employees for at least part of 20 or more weeks during the year.
• Due date: January 31 following the tax year, shifted to the next business day when Jan 31 falls on a weekend or legal holiday – for tax year 2025 the operative deadline is February 2, 2026 because January 31, 2026 is a Saturday. If all FUTA deposits were made on time and in full, the due date extends to February 10.
• FUTA rate: 6.0% on the first $7,000 of each employee’s wages. Most employers claim a 5.4% state credit, netting 0.6% – but credit reductions in certain states can raise that effective rate.
• Key pitfall: Missing Schedule A (Form 940) when employees work in credit-reduction states is a common preparer error that triggers IRS notices.
• SOP tip: Lock down your state credit-reduction state list every November, before the filing season, so you aren’t caught off-guard in January.

What Form 940 Is and When to Use It

Form 940 is the IRS’s mechanism for employers to report and reconcile their federal unemployment tax (FUTA) liability each year. While Form 941 handles quarterly payroll tax deposits including Social Security, Medicare, and withheld income tax, Form 940 is dedicated entirely to FUTA – the federal side of unemployment insurance.

FUTA works differently from FICA taxes in one important respect: it is paid entirely by the employer. There is no employee withholding. The tax funds the federal unemployment trust fund, which backs state unemployment insurance programs during periods of high claims. Employers in all 50 states, D.C., the U.S. Virgin Islands, and Puerto Rico must participate. FUTA does not apply to employers in American Samoa, Guam, or the Commonwealth of the Northern Mariana Islands (CNMI).

Who Must File

You must file Form 940 if you meet either of the following tests during the calendar year. The general test applies if you paid wages of $1,500 or more in any calendar quarter to employees in covered employment, or if you had one or more employees for at least some part of a day in any 20 or more different weeks. The 20-week count includes weeks when any one employee was on payroll, and part-time, temporary, and seasonal workers all count.

Separate triggering rules apply to household employers (who pay cash wages of $1,000 or more in any calendar quarter to household employees) and to agricultural employers (who paid $20,000 or more in cash wages in any calendar quarter or had 10 or more agricultural workers in any 20-week period). Agricultural employers file Form 940 and check the appropriate box at the top. Household-only employers with no other business employees on Forms 941, 943, or 944, however, report FUTA on Schedule H (Form 1040) instead of Form 940 (and must have an EIN to file Schedule H) – only household employers who also file 941/943/944 may include household FUTA on Form 940.

Relationship to State Unemployment Tax (SUTA)

Most employers pay both federal and state unemployment taxes. The FUTA system is designed so that employers who pay their state unemployment taxes on time receive a credit of up to 5.4% against the 6.0% federal rate. That credit brings the net FUTA cost down to 0.6% on the first $7,000 of wages per employee. If your state qualifies for the full credit and you paid SUTA on time, that’s the rate your clients should be budgeting. From my side of the desk, I always model the FUTA deposit calendar using the 0.6% rate – but flag credit-reduction states in the workflow for manual review.

When Form 940 Is Required Despite No Current Employees

If you had employees in the prior year but not in the current year, you may still need to file. Until you file a “final” Form 940, the IRS expects you to keep filing each year even for periods when no wages were paid – check Box c (“No payments to employees in 2025”) on the return rather than skipping the filing. The IRS expects a final return if employment ceased mid-year. Check the “Final: Business closed or stopped paying wages” box on the form and include the closing date. Skipping this step is one of the things that leads to IRS inquiry letters years later.

How to Complete Form 940, Section by Section

The form is shorter than it looks, but each section feeds into the next. Walking through it in order prevents the most common errors.

Header and Employer Information

Enter the EIN, legal name, and trade name (if different). Check the appropriate type box: if you paid FUTA wages only in one state, enter the state abbreviation in box 1a. If you paid wages in multiple states, check box 1b and you’ll need to complete Schedule A.

Part 1 – Tell Us About Your Return

Lines 1a and 1b capture your state reporting situation. Line 2 is checked if you paid wages in any state subject to credit reduction – this triggers Schedule A, and the additional liability eventually flows to line 11. Even single-state employers must check Line 2 when their state appears on the credit-reduction list. (Line 3 itself is the first entry in Part 2 and captures total payments to all employees, walked through in the next section.) Get these right before moving to Part 2 – they affect your credit calculation downstream.

Part 2 – Determine Your FUTA Tax Before Adjustments

Line	Description	Practitioner Note
3	Total payments to all employees	Pull from payroll register; include all compensation
4	Payments exempt from FUTA	Retirement plan contributions, dependent care, health insurance – common exemptions
5	Total payments over $7,000 per employee	FUTA wage base caps at $7,000 per person; excess is excluded here
6	Subtotal (line 4 + line 5)	Auto-calculated; verify against payroll summary
7	Total taxable FUTA wages (line 3 − line 6)	Should match your payroll system’s FUTA wage report
8	FUTA tax before adjustments (line 7 × 0.006)	Net tax at 0.6%; the form pre-applies the maximum 5.4% state UI credit – any credit reduction is added back on lines 9, 10, or 11

Part 3 – Determine Your Adjustments

This section handles two scenarios. Line 9 applies if all FUTA wages were excluded from state unemployment tax – in that case the full 5.4% credit is disallowed, and you multiply taxable wages by 0.054. Line 10 applies if some wages were excluded from SUTA (e.g., wages paid to certain corporate officers in some states), OR if you paid any state unemployment tax late (after the Form 940 due date) – complete the worksheet in the instructions rather than applying a flat 5.4%. Line 11 is the credit-reduction adjustment from Schedule A – this is where multi-state complexity lands.

Part 4 – Determine Your FUTA Tax and Balance Due or Overpayment

Line 12 is FUTA tax after adjustments. Line 13 is your total FUTA deposits made during the year through EFTPS, including any overpayment applied from a prior year. Line 14 is balance due. Line 15 is overpayment, which can be applied to next year or refunded. Quick rule you can copy into your SOP: cross-reference quarterly deposit amounts against what you entered in EFTPS before finalizing line 13. A single transposed digit here causes a mismatch notice.

Part 5 – Report Your FUTA Tax Liability by Quarter

This section is only required if line 12 exceeds $500. Report the FUTA liability (not deposits) for each quarter. The IRS uses this to verify that deposits were made correctly throughout the year. Many practitioners confuse “liability” with “payment” here – they are different. Liability accrues when wages are paid; deposits are made at quarterly intervals if the cumulative balance exceeds $500.

Schedule A – Multi-State Employers and Credit Reductions

If you paid wages in more than one state, or if any state you paid wages in is a credit-reduction state, Schedule A must be attached. The IRS publishes the list of credit-reduction states each fall (typically via Revenue Procedure). For each credit-reduction state, multiply taxable FUTA wages paid there by the applicable reduction percentage. The total flows to line 11 of Form 940. This is a step that many multi-state payroll files skip, and it almost always results in a CP2000 or balance-due notice.

Deadlines, Penalties, and Filing Requirements

Event	Due Date	Notes
Form 940 annual filing	January 31 (February 2, 2026 for TY 2025)	For the prior calendar year; deadline shifts to the next business day when Jan 31 falls on a weekend or legal holiday – Jan 31, 2026 is a Saturday
Extended deadline (if deposits current)	February 10	All FUTA deposits made on time and in full
Q1 FUTA deposit (if liability > $500)	April 30	Via EFTPS
Q2 FUTA deposit (if liability > $500)	July 31	Via EFTPS
Q3 FUTA deposit (if liability > $500)	October 31	Via EFTPS
Q4 FUTA deposit or final payment	January 31 (February 2, 2026 for TY 2025)	Due with or before the return; weekend/holiday shift applies – for TY 2025, the Q4 deposit due date is Feb 2, 2026 because Jan 31, 2026 is a Saturday

Deposit Rules

FUTA taxes are deposited quarterly using EFTPS, but only when the cumulative liability exceeds $500. If your FUTA liability at the end of a quarter is $500 or less, you carry it forward to the next quarter. At year-end (Q4), any remaining balance must be deposited by January 31 (or the next business day) via EFTPS – Form 940-V may be used to pay with the return only when the balance is $500 or less. Deposits cannot be made by check directly with the form.

Failure-to-File and Failure-to-Deposit Penalties

Penalty Type	Rate	Notes
Failure to file	5% per month, max 25%	Based on unpaid tax; minimum $435 or 100% of tax if smaller
Failure to deposit – 1–5 days late	2%	Of the amount not deposited on time
Failure to deposit – 6–15 days late	5%
Failure to deposit – 16+ days late	10%
After IRS first notice	15%	If amount not deposited within 10 days of IRS notice
Accuracy-related penalty	20%	If underpayment due to negligence or disregard of rules

Electronic Filing Threshold

Employers who file 10 or more information returns during the year are required to file electronically. Most payroll platforms – including ADP, Gusto, QuickBooks Payroll, and Paychex – handle 940 e-filing natively. If you’re preparing for small employers manually, confirm whether paper filing is still permitted for their situation. The IRS has been progressively tightening e-file requirements.

FUTA Credit Reductions – The Part Most Preparers Underestimate

The state credit reduction is the single most misunderstood aspect of Form 940, and it generates more IRS notices than almost any other FUTA filing error. Here’s the mechanics: when a state has an outstanding balance on federal unemployment trust fund loans, the IRS reduces the 5.4% FUTA credit for employers in that state. The reduction starts at 0.3% in the first year and increases by 0.3% each additional year the loan is outstanding, subject to some caps and exceptions.

From my side of the desk, I treat credit-reduction state status as a firm-wide planning flag, not a filing detail. By November, we pull the IRS announcement (usually Revenue Procedure) identifying which states have outstanding loans, update our payroll tax matrix, and communicate the effective FUTA rate to any affected clients before year-end. That gives them time to budget the additional liability rather than being surprised by it in January.

Which States Are Commonly Affected

California and New York have historically appeared on the credit-reduction list in recent years due to the volume of unemployment claims and borrowing during economic downturns. Virgin Islands has been a perennial credit-reduction territory. The list changes annually, and the reduction percentages vary. Always check the IRS announcement for the filing year rather than relying on prior-year data – small errors create big cleanup.

How to Calculate the Schedule A Amount

For each credit-reduction state where you paid wages, identify the total FUTA-taxable wages paid to employees in that state. Multiply by the applicable reduction rate. Sum across all credit-reduction states and carry the total to Form 940, line 11. The schedule itself is organized by state, so if you have employees in California with $200,000 in FUTA-taxable wages and the credit reduction is 0.9%, your Schedule A amount for California is $1,800.

FUTA Exemptions – What Wages Are Not Subject to the Tax

Not all compensation is FUTA-taxable. Understanding the exemptions reduces your client’s tax liability and avoids the reverse problem of under-reporting taxable wages.

Common FUTA-Exempt Payments

• Employer contributions to qualified retirement plans – 401(k), SEP-IRA, SIMPLE IRA employer contributions are not FUTA wages
• Group-term life insurance premiums for coverage up to $50,000
• Employer-paid health insurance premiums
• Dependent care assistance up to the statutory limit
• Workers’ compensation payments
• Certain payments to family members – payments to children under 21 employed by a parent, or to a spouse, are exempt from FUTA – note the FUTA age cutoff is 21, higher than the social-security/Medicare cutoff of 18, and employers sometimes apply the lower FICA age to FUTA in error (also check your state SUTA rules, which differ)
• Payments to statutory non-employees – real estate agents and direct sellers classified as statutory non-employees are exempt

The $7,000 FUTA Wage Base

The federal wage base for FUTA has been $7,000 per employee per year since 1983 and has not been indexed for inflation. This means for any employee earning more than $7,000 annually, FUTA tax stops accruing after the first $7,000 is paid. High-wage employers with stable workforces often have their entire annual FUTA liability satisfied by mid-Q1. The practical implication: deposit monitoring can wind down earlier in the year once all employees have exceeded the wage base.

How FUTA Interacts With Other Payroll Returns

Form 940 does not exist in isolation – it sits within a payroll tax compliance stack that includes Form 941 (quarterly federal payroll tax), state unemployment returns (SUI/SUTA), and Form W-2 year-end reporting. Errors in one often create downstream issues in another.

Reconciling FUTA With Form 941 and W-2 Data

At year-end, your total wages on all W-2s should reconcile with your total payroll reported across four 941s. The FUTA taxable wage figure on Form 940 line 7 will be lower than total W-2 wages because of the $7,000 wage base cap and exempt payments. Build a reconciliation schedule for each client that shows: total W-2 wages minus FUTA exemptions minus wages over $7,000 equals FUTA taxable wages. If this doesn’t tie out, something is wrong before you file.

State SUI Returns and the 5.4% Credit

To claim the full 5.4% FUTA credit, the employer must have paid state unemployment tax on time. “On time” means by the due date of Form 940 (January 31, or February 10 if extended). Late SUTA payments can cause a partial disallowance of the credit even if the amount was ultimately paid. This is particularly relevant for clients who let their SUTA accounts fall behind during the year and catch up in Q4 or early January.

Common Mistakes That Slow Things Down

These are the patterns we see year after year on Form 940 returns, and they are almost always timing or definition errors, not arithmetic ones.

Practical Checklists You Can Reuse

These are copy-paste ready for firm SOPs. Drop them into your December and January workpaper templates and tighten the per-employee detail as the close moves forward.

Keep 940 Season From Stalling

Form 940 looks small on paper. One page, one rate, one annual return. Then late January arrives and the reconciliation surfaces: wages have to tie to the W-3 totals, every state UI deposit has to be matched to its quarterly due date, and any 2025 credit-reduction state needs its Schedule A column pulled before the filing deadline. For tax year 2025 the operative deadline is February 2, 2026 (per IRS Form 940 instructions, because January 31 falls on a Saturday). The conditional February 10, 2026 date only opens if every required FUTA deposit during the year was timely.

Two things derail the close. Late state UI payments push the credit-reduction adjustment onto line 10 with a worksheet instead of a clean 5.4% on line 9. Successor-employer wage bases get restarted from zero. Both are timing problems, not knowledge gaps, and both are solved with a prep workflow that runs in December rather than in the last week of January.

• Run the state UI deposit log against the Form 940 due date before drafting the return. Any state UI paid late moves to line 10 with the worksheet, not the flat 5.4% on line 9.
• Add a Schedule A check for single-state employers when the state appears on the 2025 credit-reduction list. Line 2 still triggers Schedule A, and the additional liability flows to line 11.
• For any 2025 acquisition, carry forward the predecessor's per-employee wages toward the $7,000 FUTA base and check Box b for successor employer. Do not restart the wage base at zero.
• Tie line 17 (total tax liability) to the sum of lines 16a through 16d, and place any credit-reduction add-on entirely in Q4 (line 16d) even if it was pre-funded ratably.
• Walk page 2 line by line before signing: the Type-of-Return checkbox, the aggregate-filer checkbox, and the signature on both pages. An unsigned Form 940 is not a valid filing.

This is the kind of pre-filing discipline our team builds into tax delivery engagements: predecessor wage rollups, state UI deposit reconciliation, and Schedule A credit-reduction lookups happen in December, so the late-January window is just the final pass.

FAQs

What is IRS Form 940 used for?

Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return. Employers file it once per year to report their federal unemployment tax liability, claim the credit for state unemployment taxes paid, and reconcile any balance due or overpayment. The tax funds the federal side of the unemployment insurance system.

Who must file Form 940?

Any employer who paid wages of $1,500 or more in any calendar quarter, or who had at least one employee for any part of a day in 20 or more different weeks during the year, must file Form 940. Household employers and agricultural employers have separate threshold tests. Sole proprietors, partnerships, and corporations with employees all fall under these rules if the thresholds are met.

When is Form 940 due?

Form 940 is due January 31 following the close of the calendar year, shifted to the next business day when Jan 31 falls on a weekend or legal holiday – for tax year 2025 the operative deadline is February 2, 2026 because January 31, 2026 is a Saturday. If all required FUTA tax deposits were made on time and the full amount was paid, the due date extends to February 10. No automatic extension is available for the return itself, though deposits are made quarterly throughout the year via EFTPS.

What is the net FUTA tax rate?

The gross FUTA rate is 6.0% on the first $7,000 of each employee’s wages. Employers who paid their state unemployment taxes on time receive a credit of up to 5.4%, bringing the net rate to 0.6% for most employers. Employers in credit-reduction states pay a higher effective rate, with the reduction published annually by the IRS each fall.

What happens if you miss the Form 940 deadline?

Late filing triggers a penalty of 5% of the unpaid tax per month, up to a maximum of 25%. There is a minimum penalty of $435 if the return is more than 60 days late. Separate failure-to-deposit penalties apply if quarterly FUTA deposits were not made on time, ranging from 2% to 15% depending on how late the deposit was.

Can Form 940 be amended?

Yes. If you discover an error after filing, file a corrected Form 940 with Box a (Amended) checked in the Type-of-Return section – there is no separate Form 940-X. Common reasons for filing an amended return include discovering that a credit-reduction state applied and was not reported, finding an error in wages reported, or correcting a deposit misallocation. Amended Form 940 can be filed electronically via IRS Modernized e-File (MeF); file the amendment as soon as the error is identified – the sooner it is corrected, the lower the penalty exposure.