Form 940 is the IRS's Employer's Annual Federal Unemployment (FUTA) Tax Return, used to report the federal unemployment tax employers pay on the first $7,000 of each employee's wages. Only employers pay FUTA, never employees, and for 2025 the return was due on 2 February 2026, or 10 February if all FUTA tax was deposited on time.
FUTA is small per employee, but the rules about who files, when you deposit and how state unemployment tax affects the rate trip up a lot of new employers. Here's what the IRS instructions say.
Who has to file Form 940
Most employers pay both federal and state unemployment tax. The 2025 instructions use two tests. You generally file if either applies:
- You paid wages of $1,500 or more to employees in any calendar quarter during 2024 or 2025
- You had one or more employees for at least some part of a day in any 20 or more different weeks in 2024 or in 2025, counting full-time, part-time and temporary employees
Household employers have their own test: FUTA applies only if you paid cash wages of $1,000 or more in any calendar quarter, and you generally report it on Schedule H of Form 1040 rather than Form 940. Agricultural employers and tax-exempt organisations have separate rules too.
How FUTA tax is worked out
| Part | 2025 rule (as of October 2026) |
|---|---|
| Wage base | The first $7,000 paid to each employee in the calendar year, after exempt payments |
| FUTA rate | 6.0% |
| Maximum credit for state unemployment tax | Up to 5.4% |
| Multiplier used in the IRS examples | 0.006 of FUTA wages, after the maximum credit |
The IRS's worked example: three employees with $13,000 of wages subject to FUTA in the first quarter, multiplied by 0.006, gives a first-quarter liability of $78. Because that's $500 or less, no deposit is needed yet; it carries over to the next quarter.
The state tax trap
This is the insight I'd flag to every new employer. The 5.4% credit only works if you pay your state unemployment tax, and pay it on time. The instructions say your FUTA tax may be higher if you don't pay the state tax by 2 February 2026, or 10 February if that's your Form 940 due date. And if wages are excluded from state unemployment tax, such as corporate officers' pay in certain states, you may owe FUTA at the full 6.0%. In the IRS example, $9,000 of officers' wages at 0.060 comes to $540, against just $24 on $4,000 of ordinary wages.
Credit reduction states
A state that hasn't repaid funds it borrowed from the federal government to pay unemployment benefits is a credit reduction state, and the Department of Labor decides which states those are. If you paid wages subject to a credit reduction state's unemployment laws, your credit is reduced, so you pay more FUTA, worked out on Schedule A (Form 940). The 2025 instructions confirm there are credit reduction states for 2025, and the extra liability has to be included with your fourth-quarter deposit.
Payments that aren't subject to FUTA
Not everything you pay counts towards the $7,000. The instructions list payments exempt from FUTA tax because they aren't wages or the work isn't employment. They include certain meals and lodging, employer contributions to accident or health plans, section 125 cafeteria plan benefits, group-term life insurance, employer contributions to qualified retirement plans such as a 401(k) (other than elective salary reductions), and dependent care payments up to $5,000 per employee. Payments for services from your parent, your spouse or your child under 21 are exempt too, which matters for family businesses. You report these on line 4 and tick the boxes for the type of payment.
Deposits and the $500 rule
- Each quarter, work out FUTA on the part of the first $7,000 of each employee's wages paid that quarter.
- If the quarter's FUTA tax is more than $500, deposit it by the last day of the month after the end of the quarter.
- If it's $500 or less, carry it over and add it to the next quarter.
- For the fourth quarter, if it's $500 or less you can deposit it or pay it with Form 940.
- Make every federal tax deposit by electronic funds transfer, not by credit or debit card.
You report your quarterly liabilities in Part 5 of the form only if your total FUTA tax for the year is more than $500.
Amending and paying
If you need to correct a Form 940 you've already filed, the IRS now lets you file some amended employment tax returns electronically, and it issues Form 940 refunds by direct deposit. Pay any balance due electronically; the instructions warn not to use a credit or debit card for taxes that must be deposited.
Don't take it out of pay
The IRS's About page is short and firm: only employers pay FUTA tax, so don't collect or deduct it from your employees' wages. If your payroll setup shows FUTA as an employee deduction, fix it straight away. And the instructions remind you that you're responsible for filing and paying even if you contract with a third party to do it.
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My verdict
Form 940 is a small tax with a big trap: pay your state unemployment tax late and the federal bill can jump from 0.006 of wages to the full 6.0%. File by early February, deposit each quarter once you're over $500, never deduct FUTA from pay, and check whether you have staff in a credit reduction state.
Frequently asked questions
What is Form 940?
The Employer's Annual Federal Unemployment (FUTA) Tax Return, used to report federal unemployment tax on employee wages.
Who must file Form 940?
Generally employers that paid $1,500 or more in wages in any quarter, or had employees in 20 or more different weeks, in the current or previous year.
When is Form 940 due?
For 2025 it was due 2 February 2026, or 10 February 2026 if all FUTA tax was deposited on time.
What is the FUTA tax rate?
6.0% on the first $7,000 of each employee's wages, with a credit of up to 5.4% for state unemployment tax, according to the 2025 instructions.
Do employees pay FUTA tax?
No. Only employers pay FUTA, and it must not be deducted from employees' wages.
What is a credit reduction state?
A state that hasn't repaid funds borrowed from the federal government for unemployment benefits. Employers there get a smaller credit and pay more FUTA.
