Form 940: The Complete Guide to Employer's Annual Federal Unemployment Tax Return

If you've ever had an employee, you've probably encountered Form 940—even if you didn't realize it. Every year, millions of employers quietly file this two-page form and move on. But misunderstanding it can lead to late penalties, missed credits, and surprise tax bills. Here's everything you need to know to file Form 940 correctly.

What Is Form 940?

Form 940 is the Employer's Annual Federal Unemployment Tax Return. You use it to report and calculate your Federal Unemployment Tax Act (FUTA) tax liability for the year. FUTA funds the federal government's portion of the unemployment insurance system—the program that provides benefits to workers who lose their jobs through no fault of their own.

Importantly, FUTA is an employer-only tax. You do not withhold it from employee wages. You pay it entirely out of your own pocket.

FUTA vs. SUTA: What's the Difference?

Most states also have a State Unemployment Tax Act (SUTA) tax, sometimes called SUI (State Unemployment Insurance). These are separate from FUTA but closely related:

• FUTA funds the federal unemployment program (reported on Form 940)
• SUTA funds your state's unemployment program (reported on state forms)

The good news: if you pay your SUTA taxes on time and in full, you can claim a credit on your Form 940 that reduces your effective FUTA rate from 6.0% down to just 0.6%.

Who Must File Form 940?

You must file Form 940 if either of the following is true during the calendar year:

1. You paid $1,500 or more in wages to employees during any calendar quarter
2. You had at least one employee for some part of a day in any 20 or more different weeks

These thresholds apply to most businesses. The rules are slightly different for household employers and agricultural employers—if that applies to you, check IRS Publication 926 or Publication 51.

Who Does NOT Need to File Form 940

• Sole proprietors with no employees: If you're the only worker, you don't file Form 940.
• Independent contractors: Workers classified as independent contractors are not employees. You don't pay FUTA on contractor payments.
• Certain nonprofit organizations: Some 501(c)(3) organizations are exempt from FUTA.

The FUTA Tax Rate Explained

The standard FUTA tax rate is 6.0% on the first $7,000 of each employee's wages per calendar year. This $7,000 threshold is called the "FUTA wage base."

Here's what that means in practice:

• If an employee earns $7,000 or more during the year, you pay FUTA on the first $7,000 only → maximum $420 per employee
• If an employee earns less than $7,000, you pay FUTA on their actual wages
• Wages above $7,000 per employee are not subject to FUTA

The State Tax Credit

If your state isn't a "credit reduction state" (more on that below), you're entitled to a credit of up to 5.4% against the 6.0% FUTA rate. This brings your effective rate down to 0.6%.

To qualify for the full credit, you must:

• Pay your SUTA taxes in full and on time
• Not be in a state with outstanding federal loans (credit reduction states)

With the 5.4% credit applied: $7,000 × 0.6% = $42 per employee per year at most.

Credit Reduction States

Some states borrow money from the federal government to cover unemployment benefits. If a state hasn't repaid these loans, the FUTA credit is reduced—meaning employers in those states pay a higher effective FUTA rate. The IRS publishes the list of credit reduction states each November. For 2024, check Schedule A of Form 940 to see if your state is affected.

Form 940 Filing Deadline

The annual deadline to file Form 940 is January 31 of the following year. So for tax year 2024, the deadline is January 31, 2025.

There's one exception: if you've made all your FUTA deposits on time and in full throughout the year, the IRS gives you an extra 10 days—pushing the deadline to February 10.

When Are FUTA Deposits Due?

Although you file Form 940 annually, you may need to deposit FUTA taxes quarterly if your liability exceeds $500.

Here's how it works:

• At the end of each quarter, calculate your cumulative FUTA liability
• If that liability exceeds $500, you must deposit it by the last day of the month following the quarter
• If your total annual FUTA liability is $500 or less, you can pay it when you file Form 940

Quarter	Deposit Deadline (if liability > $500)
Q1 (Jan–Mar)	April 30
Q2 (Apr–Jun)	July 31
Q3 (Jul–Sep)	October 31
Q4 (Oct–Dec)	January 31

How to Complete Form 940 Step by Step

Form 940 is only two pages, but it packs in a lot. Here's a walkthrough of each part.

Part 1: Tell Us About Your Return

Answer whether you're in a multi-state employer situation or whether you paid any SUTA taxes in a credit reduction state. This determines whether you need to complete Schedule A.

Part 2: Determine Your FUTA Tax Before Adjustments

• Line 3: Total payments to all employees
• Line 4: Payments exempt from FUTA (fringe benefits, retirement contributions, dependent care, etc.)
• Line 5: Total payments in excess of $7,000 per employee (subtract these out)
• Line 7: Total taxable FUTA wages (Line 3 minus Lines 4 and 5)
• Line 8: FUTA tax before adjustments (Line 7 × 0.06)

Part 3: Determine Your Adjustments

This is where the state credit comes in. You'll calculate how much of your SUTA liability qualifies for the 5.4% credit. If all your employees' wages were subject to SUTA in a single non-credit-reduction state, this is straightforward. Multi-state employers need Schedule A.

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

Add up your deposits, subtract adjustments, and calculate whether you owe more or have an overpayment.

Part 5: Report Your FUTA Tax Liability by Quarter

If your FUTA liability exceeds $500 in any quarter, you fill in the quarterly breakdown here.

Part 6: May We Speak With Your Third-Party Designee?

Optional: designate someone (like a bookkeeper or accountant) to discuss the return with the IRS.

Part 7: Sign Here

The return must be signed by the owner, officer, or authorized agent.

How to File Form 940

Electronic Filing (Recommended)

The IRS strongly encourages electronic filing through their e-file system. You can file through:

• IRS e-file: Directly through authorized e-file providers
• Payroll software: Most payroll platforms (Gusto, ADP, Paychex, QuickBooks Payroll) file Form 940 automatically
• Tax professional: A CPA or enrolled agent can file on your behalf

Paper Filing

If you prefer paper, mail Form 940 to the IRS address listed in the instructions. The address depends on your state and whether you're including a payment. Use certified mail to create a paper trail.

Common Form 940 Mistakes to Avoid

1. Forgetting to Include All Employees

Every W-2 employee counts—full-time, part-time, seasonal, and temporary workers. Don't accidentally omit employees who only worked briefly during the year.

2. Misclassifying Workers

If you incorrectly classify an employee as an independent contractor, you'll owe FUTA taxes plus penalties when the IRS discovers the misclassification. If you're unsure, use IRS Form SS-8 to request a determination.

3. Missing Deposit Deadlines

Late FUTA deposits trigger penalties of 2% to 15% of the unpaid amount, depending on how late they are. Set calendar reminders at the end of each quarter.

4. Not Checking for Credit Reduction States

If your state is on the credit reduction list, you can't claim the full 5.4% credit. Failing to account for this means you'll underpay and owe more come January.

5. Using the Wrong Tax Year's Form

The IRS updates Form 940 periodically. Always download the current version from IRS.gov rather than using a prior year's form.

6. Forgetting to Sign

An unsigned return is not a valid return. Make sure the proper authorized individual signs before filing.

FUTA Tax Exemptions: What Wages Are Excluded?

Not all compensation counts as FUTA wages. The following are commonly excluded:

• Fringe benefits: Health insurance premiums, adoption assistance, group-term life insurance
• Retirement contributions: 401(k) deferrals, pension contributions
• Dependent care assistance: Up to $5,000 per employee
• Payments to certain family members: Wages paid to your spouse, child under 21, or parent (with some exceptions)
• Tips reported on Form 4137

Always document these exclusions carefully—they reduce your taxable FUTA wage base and lower your tax bill.

Amended Returns: Form 940-X

If you discover an error on a previously filed Form 940, use Form 940-X (Adjusted Employer's Annual Federal Unemployment Tax Return) to correct it. You can file Form 940-X to:

• Claim a refund for overpaid FUTA taxes
• Pay additional FUTA taxes you underpaid
• Correct reporting errors

There's no separate deadline for Form 940-X, but the statute of limitations for claiming a credit or refund is generally three years from when you filed the original return or two years from when you paid the tax, whichever is later.

Penalties for Not Filing or Late Filing

The IRS takes employment tax obligations seriously. Here's what you risk if you don't file or pay on time:

Violation	Penalty
Deposit 1–5 days late	2% of unpaid amount
Deposit 6–15 days late	5% of unpaid amount
Deposit 16+ days late	10% of unpaid amount
Not deposited within 10 days of IRS notice	15% of unpaid amount
Failure to file	5% per month, up to 25%

If you can't pay the full amount owed, file anyway. The failure-to-file penalty is much steeper than the failure-to-pay penalty.

Form 940 for Multi-State Employers

If you have employees in multiple states, you need to complete Schedule A (Form 940). This form breaks down your FUTA wages and credits state by state. If any of your states are credit reduction states, Schedule A calculates the additional FUTA tax owed.

Multi-state employers often benefit from working with a payroll service that handles the complexity automatically.

Frequently Asked Questions

Do I file Form 940 if I had no employees for part of the year? If you met either threshold (paid $1,500+ or had employees for 20+ weeks), yes—even if you have no employees now.

What if I'm a household employer? Household employers generally file Schedule H instead of Form 940, unless they also run a business with employees.

Can I get an extension on Form 940? Unlike individual income taxes, there's no automatic extension for Form 940. If you've made all deposits on time, you automatically get until February 10.

What happens if my FUTA liability is always under $500? You don't need to make quarterly deposits. Pay the full amount when you file Form 940 by January 31.

Keep Your Payroll Records Organized

Filing Form 940 accurately depends on having clean payroll records throughout the year. You need to know:

• Total wages paid to each employee
• FUTA-exempt payments (benefits, excluded compensation)
• Wages in each state for multi-state employers
• SUTA taxes paid to each state and whether they were timely

Disorganized records don't just make Form 940 harder—they create risk across all your payroll tax filings.

Simplify Your Payroll Tax Recordkeeping

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