The Netchex Definitive Guide to Form 940 (2026)

Form 940 is the annual federal tax return used by employers to report and pay Federal Unemployment Tax Act (FUTA) taxes. FUTA taxes help fund unemployment compensation programs administered by states. 

Unlike payroll taxes such as Social Security or Medicare, FUTA taxes are paid entirely by the employer and are not withheld from employee wages. 

References 

 IRS — About Form 940
 IRS Publication 15 (Employer’s Tax Guide) 

FUTA tax is a federal payroll tax that employers pay to fund unemployment benefits for workers who lose their jobs. The tax is based on employee wages but is paid solely by employers. 

The funds collected through FUTA support state unemployment insurance programs and help ensure benefits are available during periods of unemployment. 

References 

IRS — Federal Unemployment Tax Act 

Most employers must file Form 940 if they paid $1,500 or more in wages during any calendar quarter of the year or if they had one or more employees for at least part of 20 different weeks during the year. 

These requirements apply even if the employer’s business is small or newly established. 

References 

 IRS — FUTA Tax Requirements 

Form 940 is due January 31 following the end of the calendar year. Employers who have deposited all FUTA taxes on time may receive an additional filing extension of 10 days. 

Employers must ensure that both the tax return and any remaining FUTA payments are submitted by the required deadlines. 

References 

 IRS — Form 940 Instructions 

FUTA tax applies to most wages paid to employees during the year. However, the tax is only applied to the first $7,000 of wages paid to each employee annually, which is known as the FUTA wage base. 

Once an employee’s wages exceed the wage base for the year, additional wages are not subject to FUTA tax. 

References 

IRS — FUTA Tax 

The FUTA tax rate is generally 6.0% of the first $7,000 of wages paid to each employee. However, most employers receive a credit of up to 5.4% for state unemployment taxes, which reduces the effective federal tax rate. 

The final amount owed depends on whether the employer receives the full credit. 

References 

IRS Publication 15 

Some states borrow funds from the federal government to pay unemployment benefits. When those loans remain unpaid, employers in those states may receive a reduced FUTA credit. 

This results in employers paying a slightly higher FUTA tax rate for employees working in those states. 

References 

IRS — Credit Reduction States

Employers calculate FUTA tax by applying the FUTA rate to each employee’s taxable wages up to the annual wage base. Employers must also account for state unemployment taxes when calculating the final FUTA liability. 

Accurate wage tracking throughout the year is necessary to ensure correct calculations. 

References 

IRS Instructions for Form 940 

FUTA taxes must generally be deposited quarterly if the accumulated FUTA liability exceeds $500 during the quarter. 

If the total FUTA liability for the year is $500 or less, employers may pay the tax when filing Form 940. 

References 

IRS FUTA Deposit Rules

Employers must deposit FUTA taxes using the Electronic Federal Tax Payment System (EFTPS). EFTPS allows businesses to make federal tax payments electronically and schedule payments in advance. 

Employers must enroll in EFTPS before using the system.  

References 

IRS EFTPS 

Failure to deposit FUTA taxes on time may result in penalties and interest charges from the IRS. The amount of the penalty typically depends on how late the payment is submitted. 

Employers should monitor FUTA liabilities regularly to avoid late deposits. 

References 

 IRS Penalty Information 

Household employers typically do not file Form 940 for household employees. Instead, household employment taxes are generally reported using Schedule H when filing an individual tax return. 

References 

IRS Household Employer Tax Guide 

Agricultural employers may be required to file Form 940 depending on wage thresholds and the number of employees they employ during the year. 

These requirements are separate from other agricultural employment tax rules. 

References 

IRS Agricultural Employer Guide 

Employers should maintain records of employee wages, FUTA tax calculations, and federal tax deposits. These records help support the amounts reported on Form 940 and assist in resolving questions from the IRS. 

References 

IRS Recordkeeping Requirements 

If an employer discovers an error on a previously filed Form 940, the correction may be made on a future return or through amended reporting procedures depending on the nature of the error. 

Employers should review IRS guidance to determine the correct correction method. 

References 

 IRS Form 940 Instructions 

The FUTA wage base is the maximum amount of wages per employee that are subject to federal unemployment tax each year. Currently, FUTA tax applies only to the first $7,000 of wages paid to each employee during the calendar year. 

Once an employee’s wages exceed the wage base, additional wages are not subject to FUTA tax for that year. 

References 

IRS FUTA Tax Overview 

Most wages paid to employees are subject to FUTA tax, including salaries, hourly wages, bonuses, commissions, and certain fringe benefits. However, some types of compensation may be excluded from FUTA calculations under federal tax rules. 

Employers should review IRS guidance to determine whether specific payments are subject to FUTA tax. 

References 

IRS Publication 15 

Payments made to independent contractors are not subject to FUTA tax because contractors are not classified as employees. Instead, contractors are responsible for paying their own self-employment taxes. 

Employers must correctly classify workers to determine whether FUTA tax applies. 

References 

IRS Independent Contractor Guidance 

Certain nonprofit organizations that qualify for tax-exempt status under section 501(c)(3) are exempt from FUTA tax. However, other nonprofit entities may still be required to pay FUTA depending on their classification. 

Organizations should confirm their tax-exempt status to determine their FUTA obligations. 

References 

IRS Exempt Organization Tax Guide 

Employers generally receive a credit for state unemployment taxes paid, which reduces their FUTA liability. This credit can lower the effective federal tax rate significantly. 

However, the credit amount depends on whether the employer paid the required state unemployment taxes on time. 

References 

IRS FUTA Credit 

Because FUTA applies only to the first $7,000 of wages per employee, the maximum FUTA tax is calculated based on that wage base and the applicable FUTA rate. 

Employers that qualify for the full state tax credit generally pay a reduced effective FUTA rate. 

References 

IRS Publication 15 

A credit reduction state is a U.S. state that has borrowed funds from the federal government to pay unemployment benefits and has not repaid the loan within the required timeframe. Employers in these states may receive a reduced FUTA credit. 

This reduction increases the amount of FUTA tax employers must pay. 

References 

IRS Credit Reduction States 

The IRS publishes a list of credit reduction states each year. Employers should review this information when preparing their annual FUTA tax calculations. 

The credit reduction may change from year to year depending on state repayment status. 

References 

IRS Credit Reduction States 

Employers should track taxable wages for each employee throughout the year and apply the FUTA rate to those wages up to the wage base. The total FUTA tax liability for the quarter determines whether a deposit is required. 

Employers should calculate their liability at the end of each quarter to determine if it exceeds the deposit threshold. 

References 

IRS Instructions for Form 940 

Employers must deposit FUTA taxes if their accumulated liability exceeds $500 during a calendar quarter. If the liability remains below this threshold, the balance may be carried forward to the next quarter. 

If the total annual liability remains below the threshold, the tax can be paid when filing Form 940. 

References 

IRS FUTA Tax Deposit Rules 

FUTA deposits are typically due by the end of the month following the close of the quarter in which the liability exceeded the deposit threshold. 

Employers should monitor their liability to ensure deposits are made by the required deadlines. 

References 

IRS Instructions for Form 940

Late FUTA deposits may result in penalties and interest assessed by the IRS. The penalty amount depends on how late the payment is submitted and the total tax due. 

Timely deposits help avoid additional compliance costs. 

References 

IRS Penalty Information 

Employers should maintain payroll records showing employee wages, FUTA calculations, state unemployment tax payments, and federal tax deposits. 

These records help support the figures reported on Form 940. 

References 

IRS Recordkeeping Guidance 

Yes. Employers may file Form 940 electronically through IRS e-file systems or authorized e-file providers. 

Electronic filing is often faster and may reduce processing errors. 

References 

IRS e-file for Businesses 

Yes. Employers may file a paper Form 940 by mailing it to the appropriate IRS processing center. However, electronic filing is generally encouraged for faster processing. 

References 

IRS Form 940 

Form 940 includes employer identification information, total wages paid, FUTA taxable wages, tax calculations, and deposits made during the year. 

This information helps determine the employer’s final FUTA tax liability. 

References 

IRS Form 940 Instructions

An Employer Identification Number (EIN) is a unique number assigned by the IRS to identify a business entity for tax reporting purposes. Employers must use their EIN when filing Form 940. 

References 

IRS EIN Overview 

Seasonal employers may still be required to file Form 940 if they meet the wage or employee thresholds for FUTA liability during the year. 

References 

 IRS FUTA Tax Requirements 

If a business closes during the year, it must still file a final Form 940 for that year to report FUTA taxes owed on wages paid before the business ceased operations. 

References 

IRS Closing a Business 

If errors are discovered after filing Form 940, employers may correct them using the procedures described in the IRS instructions for the form. 

References 

IRS Form 940 Instructions 

Bonuses paid to employees are generally considered taxable wages and are included when calculating FUTA tax up to the wage base. 

References 

IRS Publication 15 

Some fringe benefits may be considered taxable wages and included in FUTA calculations depending on the type of benefit provided. 

References 

IRS Publication 15-B 

Tips received by employees may be included in FUTA wage calculations if they are reported to the employer as required under federal tax rules. 

References 

IRS Tip Income Guidance 

Employers operating in multiple states must track employee wages and unemployment taxes paid in each state to determine the correct FUTA credit. 

References 

IRS FUTA Tax Guide 

If FUTA taxes are underpaid, the IRS may assess penalties and interest. Employers should correct underpayments promptly to reduce additional charges. 

References 

IRS Penalties 

If an employer overpays FUTA tax, the excess amount may generally be applied as a credit toward future tax liabilities or refunded by the IRS. Employers should review the overpayment options provided on Form 940 when completing the return. 

Maintaining accurate payroll records helps ensure FUTA tax calculations are correct and reduces the likelihood of overpayments. 

References 

IRS Instructions for Form 940 

IRS Overpayment Guidance 

FUTA tax is a federal payroll tax used to support unemployment programs across the United States, while state unemployment taxes fund benefits administered by individual states. 

Employers often pay both taxes, but state payments may provide credits that reduce the federal FUTA liability. 

References 

IRS FUTA Tax Overview 

Form 940 requires employers to report total wages paid during the year, taxable FUTA wages, adjustments for state unemployment taxes, and the final FUTA tax liability. 

The form also includes sections for reporting quarterly tax deposits and determining whether additional tax is owed. 

References 

 IRS Form 940 Instructions

Yes. Many employers authorize payroll service providers to calculate FUTA taxes, make deposits, and file Form 940 on their behalf. However, the employer remains legally responsible for ensuring the taxes are filed and paid correctly. 

Employers should monitor payroll reports and tax filings even when using a third-party provider. 

References 

IRS Third Party Payers 

Yes. Employers should reconcile payroll records, FUTA taxable wages, and federal tax deposits before filing Form 940 to ensure the reported figures are accurate. 

Reconciliation helps identify discrepancies and prevents reporting errors. 

References 

IRS Publication 15 

Payroll records that support FUTA reporting include wage summaries, employee payment histories, state unemployment tax payments, and federal tax deposit confirmations. 

Maintaining organized records helps employers verify the information reported on Form 940. 

References 

IRS Recordkeeping Requirements 

Some employee benefits may be included in FUTA taxable wages if they are considered taxable compensation under federal tax rules. 

Employers should review IRS guidance to determine whether specific benefits are subject to FUTA tax. 

References 

 IRS Publication 15-B 

Federal unemployment taxes help fund unemployment compensation programs that provide temporary financial assistance to individuals who lose their jobs. 

The program supports state unemployment systems and helps stabilize income for unemployed workers. 

References 

U.S. Department of Labor — Unemployment Insurance 

Yes. Wages paid to part-time employees are generally subject to FUTA tax just like wages paid to full-time employees, up to the FUTA wage base. 

Employers must include these wages when calculating FUTA liability. 

References 

IRS FUTA Tax Guidance 

The IRS administers and collects FUTA taxes, while state agencies manage the distribution of unemployment benefits and state unemployment insurance programs. 

The coordination between federal and state systems ensures consistent unemployment coverage nationwide. 

References 

IRS FUTA Tax Overview 

If an employer discovers an error after filing Form 940, adjustments may be required depending on the nature of the mistake. 

Employers should follow IRS instructions to determine the right correction procedure. 

References 

IRS Instructions for Form 940 

Failure to file Form 940 may result in penalties and interest assessed by the IRS. The penalty amount depends on how late the return is filed and whether taxes are also unpaid. 

Timely filing helps employers avoid unnecessary compliance costs. 

References 

IRS Penalty Information 

Commissions paid to employees are generally considered wages and are included when calculating FUTA tax, subject to the annual wage base. 

Employers must include commission payments in FUTA wage calculations. 

References 

IRS Publication 15 

Overtime payments are generally considered taxable wages and are included when calculating FUTA tax liability until the employee reaches the FUTA wage base. 

Employers should track overtime payments as part of total wages paid. 

References 

IRS Publication 15 

Severance payments may be considered taxable wages and included in FUTA wage calculations depending on how the payments are structured. 

Employers should review IRS guidance when determining the tax treatment of severance pay. 

References 

IRS Publication 15-A 

If payroll records do not match the amounts reported on Form 940, employers should investigate discrepancies before submitting the return. 

Accurate reconciliation helps ensure compliance with federal payroll tax reporting requirements. 

References 

IRS Form 940 Instructions 

Many employers rely on payroll software to calculate FUTA tax automatically based on employee wages and applicable tax rates. 

Payroll systems can help reduce calculation errors and simplify year-end tax reporting. 

References 

IRS Publication 15 

Accurate payroll tracking ensures that taxable wages, FUTA liabilities, and required deposits are calculated correctly throughout the year. 

Consistent tracking helps employers meet federal reporting requirements and avoid penalties. 

References 

IRS Recordkeeping Guidance 

State unemployment agencies collect state unemployment taxes and administer unemployment benefits within each state. 

Employers report and pay state unemployment taxes separately from federal FUTA taxes, though these payments affect federal tax credits. 

References 

U.S. Department of Labor — Unemployment Insurance 

Form 940 allows employers to report their annual federal unemployment tax obligations and verify that required FUTA taxes have been paid. 

Accurate reporting ensures compliance with federal tax laws and supports unemployment benefit programs. 

References 

IRS — About Form 940