If you have W-2 employees, this form affects you. Many small business owners assume FUTA is automatic, handled somewhere in the payroll process. It often isn't — and missed deadlines or miscalculations trigger IRS penalties that compound fast.
This guide covers how FUTA tax works, who must file, how to calculate and make payments, and the errors that cost employers the most.
Key Takeaways
- Form 940 is filed once per year by January 31, but FUTA deposits are made quarterly when liability exceeds $500
- FUTA applies only to the first $7,000 of each employee's wages — wages above that are excluded
- Timely SUTA payments earn a credit that drops the effective FUTA rate from 6% to 0.6%
- FUTA is employer-paid only — not deducted from employee wages
- Employers in credit reduction states pay a higher FUTA rate due to their state's unpaid federal unemployment loans
What Is Form 940?
Form 940 — officially the Employer's Annual Federal Unemployment Tax Return — is a one-page IRS form used to calculate and report your total FUTA tax liability for the calendar year. FUTA is an employer-only tax. It funds the federal and state unemployment benefit system, and employees never contribute to it.
How the FUTA Rate Works
The gross FUTA rate is 6%, applied to the first $7,000 of each employee's annual wages. That $7,000 figure is the federal wage base — once an employee crosses it, their remaining wages are excluded from FUTA for the rest of that year.
Employers who pay their state unemployment tax (SUTA) on time and in full can claim a credit of up to 5.4%, reducing the effective rate to 0.6%. For a business with 10 employees, that works out to a maximum FUTA liability of $420 for the year, provided SUTA obligations are met on schedule.
Form 940 vs. Form 941
Understanding the FUTA rate is straightforward once you know which form handles it. Form 940 is often confused with Form 941, but they cover entirely different taxes:
| Form | Filed | Covers |
|---|---|---|
| Form 940 | Annually (by Jan 31) | FUTA — employer-only unemployment tax |
| Form 941 | Quarterly | FICA (Social Security/Medicare) + federal income tax withholding |
Most employers with W-2 employees are required to file both. Missing either deadline triggers separate penalties, so it's worth tracking them on different schedules from the start.
Who Must File Form 940 — And Who Is Exempt
General Filing Thresholds
You must file Form 940 if either of the following applies during the calendar year:
- You paid $1,500 or more in wages in any calendar quarter, or
- You had one or more employees for at least part of a day in 20 or more different weeks (weeks don't need to be consecutive)
Both full-time and part-time workers count toward these thresholds.
Agricultural employers follow separate rules. File if you paid $20,000 or more in cash wages to farmworkers in any quarter, or employed 10 or more farmworkers for at least part of a day in 20 or more different weeks.
Who Is Exempt
- 501(c)(3) nonprofit organizations — religious, educational, scientific, and charitable organizations are generally exempt
- Federal and state government entities
- Indian tribal governments that participated in their state unemployment system for the full year and complied with applicable state law
- Employers working only with independent contractors — payments to correctly classified 1099 workers are not subject to FUTA and don't count toward either threshold. Note that if a contractor is later reclassified as an employee, FUTA obligations can arise retroactively.
Still Have to File Even With No Wages?
Yes. If your business previously had employees but paid no wages during the current tax year, file Form 940 anyway and check the appropriate box. The IRS will treat a missing return as unfiled, which can trigger notices and penalties.
Form 940 Payment Schedule: When and How to Pay FUTA Tax
Filing and paying follow two separate timelines. Many employers miss deposits because they treat Form 940 as an all-in-one annual obligation — it isn't.
Form 940 is filed once per year by January 31. FUTA tax deposits, however, are required quarterly when your cumulative liability exceeds $500.
Quarterly Deposit Due Dates
| Quarter | Period | Deposit Due |
|---|---|---|
| Q1 | January – March | April 30 |
| Q2 | April – June | July 31 |
| Q3 | July – September | October 31 |
| Q4 | October – December | January 31 |
If a due date falls on a weekend or federal holiday, the next business day applies.
The $500 Carry-Forward Rule
If your FUTA liability for a quarter is $500 or less, you don't deposit — you carry it forward to the next quarter. Once the running total exceeds $500, a deposit is due.
Example: Your Q1 liability is $310. No deposit required — carry it forward. In Q2, you accrue another $280, bringing the total to $590. That $590 must be deposited by July 31.
If your total annual liability is $500 or less, you may pay the full balance when you file Form 940 in January instead of making quarterly deposits.
How to Make FUTA Deposits
All federal tax deposits must be made electronically. Accepted options include:
- EFTPS (Electronic Federal Tax Payment System) — the primary method; free through the U.S. Treasury
- IRS business tax account — available for registered business entities
- Same-day wire transfer — for deposits initiated through your financial institution
Paper checks are not accepted for federal employment tax deposits. EFTPS enrollment is required and can take up to five business days, so set it up before your first deposit deadline.
How to Complete and File Form 940
Form 940 has seven parts. Here's what each covers:
| Part | Purpose |
|---|---|
| Part 1 | State unemployment tax status |
| Part 2 | FUTA tax before adjustments (total wages, exempt payments, wages above $7,000) |
| Part 3 | Credits and adjustments (SUTA credit, credit reduction states) |
| Part 4 | Final balance due or overpayment |
| Part 5 | Quarterly liability breakdown (only required when total tax exceeds $500) |
| Part 6 | Third-party designee (optional) |
| Part 7 | Employer signature |
Filing options:
- E-file through IRS-approved software or an authorized provider — the IRS-preferred method
- Paper filing — mail to the address listed in the Form 940 instructions for your state
Beginning with the 2025 Form 940, overpayment refunds can be directly deposited into your bank account by completing lines 15c–15e (routing number, account type, and account number). Previously, refunds were issued only by check.
If filing and tracking these details each year feels like more than you want to manage internally, F.I.C. handles Form 940 preparation as part of its payroll services, priced at $100 per form. Businesses that prefer a single arrangement covering payroll, bookkeeping, sales tax, and year-end filings can also explore the FIC Package, which starts at $500/month and scales with company size.
Key Factors That Affect Your FUTA Tax Liability
Credit Reduction States
When a state borrows federal funds to cover unemployment benefits and fails to repay the loan on time, the Department of Labor designates it a credit reduction state. Employers in these states see their 5.4% FUTA credit reduced — typically by 0.3 percentage points for each year the loan remains unpaid.
For the 2024 tax year, the following jurisdictions carried credit reductions:
| Jurisdiction | Credit Reduction Rate | Effective FUTA Rate |
|---|---|---|
| California | 0.9% | 1.5% |
| New York | 0.9% | 1.5% |
| U.S. Virgin Islands | 4.2% | 4.8% |
Affected employers calculate additional liability on Schedule A (Form 940). The reduction stacks on top of the standard 0.6% rate — it doesn't replace it.
FUTA-Exempt Payments
Certain payments are excluded from FUTA and deducted from total wages on Line 4 before calculating the tax base:
- Employer contributions to qualified retirement plans (401(k), SIMPLE IRAs) — note that employee elective deferrals are still taxable
- Group-term life insurance premiums paid by the employer
- Employer contributions to accident or health plans, including HSAs
- Dependent care assistance up to $5,000 per employee ($2,500 for married employees filing separately)
- Workers' compensation payments for work-related injury or illness
- Noncash wages for agricultural labor and household work
Late State Unemployment Tax Payments
Paying SUTA late doesn't forfeit the entire FUTA credit — but it reduces it. Under the IRS worksheet, late SUTA payments qualify for only 90% of the otherwise allowable credit amount.
That means an employer who pays SUTA after the Form 940 due date still gets partial credit, but loses 10% of what they would have received for those late-paid contributions. To avoid the penalty, SUTA payments must be posted before your Form 940 filing deadline of January 31.
Common Form 940 Mistakes to Avoid
Miscalculating the Taxable FUTA Wage Base
The most frequent calculation error: multiplying the 0.6% rate against total wages instead of taxable FUTA wages. Before applying the rate, you must subtract:
- Exempt payments (Line 4) — retirement contributions, health plan payments, etc.
- Wages above the $7,000 per-employee threshold (Line 5)
Only what remains is subject to FUTA tax.
FUTA Is Not Withheld From Paychecks
FUTA is 100% employer-paid. Two rules every employer needs to know:
- No paycheck deductions — FUTA should never appear as a line item on an employee's pay stub. If your payroll setup shows a FUTA withholding from employee wages, correct it before your next payroll run.
- 1099 contractors don't count — Only W-2 employees trigger Form 940 obligations, both their wages and their headcount.
Penalties for Late Filing and Late Deposits
The IRS penalty structure for Form 940 failures is escalating:
Failure-to-File penalty: 5% of unpaid tax per month, up to 25% maximum.
Failure-to-Deposit penalty schedule:
| Timing | Penalty |
|---|---|
| 1–5 calendar days late | 2% |
| 6–15 calendar days late | 5% |
| More than 15 days late (paid before first IRS notice + 10 days) | 10% |
| Non-electronic deposit when electronic is required | 10% |
| Still unpaid after IRS notice and demand | 15% |
Interest accrues on top of every penalty tier — and it compounds daily until the full balance clears. A deposit that's 30 days late can easily cost 25% or more of the original tax owed once penalties and interest stack.
Frequently Asked Questions
What is included in Form 940 payments?
Form 940 payments cover the employer's annual FUTA tax, calculated on the first $7,000 of each employee's wages minus exempt payments and wages above the threshold. This includes both the quarterly deposits made throughout the year and any remaining balance due when the annual return is filed.
Is Form 940 filed quarterly or annually?
Form 940 itself is filed annually by January 31, but FUTA tax deposits are made quarterly when liability exceeds $500 in any quarter. Filing and paying are separate obligations — the form reports the full year's liability, while deposits are made throughout the year.
What does "total payments to each employee in excess of $7,000" mean on Form 940?
Line 5 captures wages paid beyond the $7,000 FUTA wage base per employee. Those excess wages are subtracted before calculating the tax, which lowers your total taxable FUTA wages.
What is the FUTA tax rate for employers?
The gross rate is 6% on the first $7,000 of each employee's wages. Most employers receive a 5.4% credit for timely SUTA payments, bringing the effective rate down to 0.6%. Employers in credit reduction states pay a higher rate.
What happens if I miss the Form 940 filing deadline?
The IRS charges a Failure-to-File penalty of 5% of unpaid tax per month the return is late, up to 25%. Interest accrues separately. Late deposit penalties apply independently and start at 2% for amounts just one to five days overdue.
Do independent contractors count toward Form 940 filing requirements?
No. Correctly classified 1099 contractors don't count toward either the wage test or the employee test for Form 940. FUTA applies only to W-2 employees, and contractor payments are excluded from all FUTA calculations.
