This is an annual employer filing covering a different tax from the quarterly employment returns, which is why employers who file those correctly are still sometimes surprised to find this one outstanding.
It interacts with the equivalent state contributions, and that interaction is where the arithmetic becomes less obvious than the form suggests, particularly for employers operating in more than one state.
This covers who has to file, how the credit for state contributions works, what happens in states where that credit is reduced, and the reconciliation worth doing before the return goes in.
Form 940 reports your Federal Unemployment Tax Act (FUTA) obligations for the year. Unlike FICA taxes, FUTA is paid entirely by the employer, it is never withheld from employees' wages. This guide explains who files, how to calculate the tax, and what the FUTA credit means for your bottom line.
Who Must File Form 940
You must file Form 940 if:
- You paid wages of $1,500 or more to employees in any calendar quarter during the current or preceding year, OR
- You had one or more employees for at least part of a day in any 20 or more different weeks during the current or preceding year
Household employers (nannies, housekeepers) and agricultural employers have different rules and different forms.
This covers a different tax from the quarterly employment returns, so it is an additional filing rather than a summary of them, and that catches employers out. The wages on it should still reconcile to the same payroll records. Do that reconciliation at the year end and you avoid a much longer conversation later.
Ankit Sarawagi, CPA, CA, MBA · LinkedInFUTA Tax Rate and Wage Base
| Item | Detail |
|---|---|
| FUTA gross rate | 6% of the first $7,000 paid to each employee per year |
| FUTA wage base | $7,000 per employee, wages above this are not subject to FUTA |
| Maximum gross FUTA per employee | $420 per employee ($7,000 x 6%) |
| FUTA credit (normal) | Up to 5.4% credit for state unemployment insurance (SUTA) taxes paid |
| Effective FUTA rate (normal) | 0.6% after the full credit ($42 per employee) |
The FUTA Credit
The 5.4% FUTA credit is the most important concept in Form 940 planning. To receive the full credit, you must:
- Pay your state unemployment (SUTA/SUI) taxes on time by January 31 of the following year
- Be in a state that is NOT on the FUTA credit reduction list
- Report your state wages correctly
Pro Tip: If you are late paying your state UI taxes, you lose the FUTA credit for the late amount, your effective FUTA rate goes up dramatically. Always pay SUTA on time.
Credit Reduction States
States that have borrowed from the federal unemployment trust fund and have not repaid the loans are subject to FUTA credit reduction. The credit is reduced by 0.3% for the first year and an additional 0.3% for each subsequent year.
Filing Deadline
| Event | Deadline |
|---|---|
| Form 940 due date | January 31 of the following year |
| If all FUTA tax was deposited on time | February 10 (10-day extension) |
| Extension | No automatic extension for Form 940 |
FUTA Deposit Rules
You do not deposit FUTA tax with each payroll. Instead, you accumulate FUTA liability and deposit when it exceeds $500:
- Check your FUTA liability at the end of each calendar quarter
- If the liability exceeds $500, deposit by the last day of the month following the quarter
- Deposit quarters: Q1 (April 30), Q2 (July 31), Q3 (October 31), Q4 (January 31)
- If FUTA liability for the year is $500 or less, no deposit is required, just pay with the return
FUTA deposits are made through the Electronic Federal Tax Payment System (EFTPS). Unlike payroll tax deposits, FUTA deposits are quarterly rather than semi-weekly or monthly.
Key Form 940 Sections
| Line | Purpose |
|---|---|
| Lines 1a-1b | State reporting, total wages in all states |
| Lines 2-4 | FUTA wage base calculation, exclusions from FUTA wages |
| Line 5 | Total taxable FUTA wages (Line 1c minus Line 4) |
| Line 6 | FUTA tax before adjustments (Line 5 x 6%) |
| Lines 7-9 | Adjustments: if all state UI taxes were not paid on time, or credit reduction applies |
| Line 10 | Total FUTA tax after adjustments |
| Lines 11-12 | FUTA deposits made during the year |
| Lines 13-15 | Balance due or overpayment |
| Schedule A | Multi-state employers, list wages per state and credit reduction calculation |
Wages Excluded from FUTA
- Wages above $7,000 per employee
- Payments for retirement plans (401k, pension contributions)
- Employer-paid health insurance premiums
- Payments to independent contractors (1099 workers)
- Wages paid to a spouse, parent, or child under age 21 if working for a sole proprietor or partnership
- Certain agricultural wages
Penalties
| Violation | Penalty |
|---|---|
| Failure to file Form 940 | 5% of unpaid tax per month, up to 25% |
| Failure to pay FUTA tax | 0.5% per month, up to 25% |
| Failure to make required deposits | 2-15% depending on how late (escalating) |
| Failure to deposit using EFTPS | 10% penalty |
Common Mistakes
- Including independent contractors in FUTA calculations (1099 workers are not FUTA employees)
- Forgetting to account for the credit reduction in states with federal loan balances
- Late SUTA payments that disqualify the 5.4% credit
- Not depositing when the $500 threshold is crossed at the end of a quarter
- Incorrect FUTA wage base, remembering the $7,000 cap per employee per year, not per quarter
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Frequently Asked Questions
Do S-corp shareholder-employees owe FUTA?
Yes. Wages paid to shareholder-employees of an S-corp are subject to FUTA. However, distributions from the S-corp are not wages and are not subject to FUTA.
If I only have one employee who earned $7,000, what is my FUTA liability?
At the normal effective rate of 0.6% (after the full credit), your FUTA liability is $42. If you are in a credit reduction state, the rate is higher and the liability increases.
What if I acquired a business during the year?
If you acquired a business and continued its workforce, you may be able to count the prior owner's FUTA wages toward the $7,000 wage base. This avoids paying FUTA twice on the same employee's first $7,000. The rules are complex, consult a tax professional.
How do I amend Form 940?
File Form 940-X (Adjusted Employer's Annual Federal Unemployment Tax Return) for corrections.
How does this fit with the other employment filings?
It covers a different tax from the quarterly employment returns, so it is an additional filing rather than a summary of them. The wages reported should nevertheless be capable of reconciliation to the same payroll records, and a difference between them that nobody can explain is a common trigger for correspondence. Reconciling the annual filing to the quarterly ones at the year end is a short exercise that prevents a long one.
Written by
Ankit Sarawagi, CPA, CA, MBA
Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn
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