About IRS Form 940, Employers Annual Federal Unemployment (FUTA) Tax Return

Your payroll year-end checklist probably has Form 941 front and center — but Form 940 is the one that quietly bites firms when it’s wrong. Miss the deposit threshold, miscalculate the state credit, or file a day late and you’re looking at a 5% monthly penalty that stacks to 25%. This guide walks through every part of the form, the deposit triggers, and where firms consistently go wrong.

What Form 940 Actually Does

Form 940 — the Employer’s Annual Federal Unemployment (FUTA) Tax Return — reports your total FUTA liability for the calendar year. The tax itself funds federal unemployment compensation programs. Only employers pay it; you cannot withhold it from employee paychecks or shift it to the worker in any form.

The base rate is 6.0% on the first $7,000 of each employee’s annual wages. If your state unemployment taxes are current, you receive a 5.4% credit, dropping the effective federal rate to 0.6%. That credit is the rule for most employers — but it disappears for employers in states that have borrowed from the federal unemployment trust fund and haven’t repaid. Check your state’s status before you assume you’re at 0.6%.

Who Must File

You must file Form 940 if either of these conditions applies during the current or prior year:

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

Household employers are a separate case: if you paid cash wages of $1,000 or more in any calendar quarter, you file Form 940 rather than Schedule H. That’s a common mix-up for bookkeepers handling household payroll clients.

2025 and 2026 Deadlines

For tax year 2025: the filing deadline is February 2, 2026, because January 31 falls on a weekend. If you deposited all FUTA tax on time throughout the year, the deadline extends to February 10, 2026.

For tax year 2026: the deadline reverts to January 31, 2027, with the same February 10 extension if all deposits were made on time.

Mark the deposit rule separately from the filing date — those are two different clocks.

The Deposit Rule That Trips People Up

Form 940 is an annual return, but the deposits may be quarterly. The trigger:

• FUTA liability exceeds $500 in a quarter → deposit as soon as possible, don’t wait for year-end.
• Balance is $500 or less → you can carry it forward and pay when you file.

In practice: run a FUTA liability estimate at the end of Q1, Q2, and Q3. If the cumulative balance crosses $500 at any quarter-end, that’s your deposit deadline. Missing a required deposit is what generates the 5% monthly penalty — not just missing the January 31 filing date.

How to Complete Form 940 — Part by Part

Step 1: Pull Your Source Numbers

Before touching the form, gather:

• Total gross wages paid (from payroll records or your payroll software)
• State unemployment tax (SUTA) payments made and confirmation of timely payment
• Your EIN
• Any exempt payments: fringe benefits, retirement contributions, dependent care, group-term life over $50,000

If you’re running QuickBooks Desktop or a similar payroll application, the FUTA liability report gives you gross wages, exempt wages, and the 7,000-per-employee cap calculation in one place. QuickBooks Desktop Payroll Cloud Hosting Guide

Step 2: Part 1 — Confirm Exemptions and Credit

Lines 1–2 ask whether you paid FUTA-exempt wages (state or local government employees, some agricultural workers, etc.) or wages to household employees. Answer accurately — incorrect exemption claims are a common audit flag.

Step 3: Part 2 — Calculate Taxable FUTA Wages

• Line 3: Total payments to all employees.
• Lines 4–8: Subtract exempt payments and any wages above the $7,000-per-employee threshold.
• The result is your total taxable FUTA wages.
• Apply the 6.0% gross rate to that figure.

Step 4: Part 3 — Determine Your Credits and Adjustments

This is where the 5.4% credit lives. If your state unemployment taxes were paid in full and on time, you claim the maximum credit, leaving a 0.6% net rate. If your state is a credit reduction state, Part 3 adds back a portion of that credit — you’ll find the applicable rates on IRS each fall, usually in November.

For a firm with 10 employees each earning over $7,000, taxable FUTA wages are capped at $70,000. At 0.6%, that’s a $420 annual liability — manageable, but only if the credit holds.

Step 5: Part 4 — FUTA Tax and Deposits

Report your quarterly FUTA liability and reconcile it against deposits already made. Any balance owed goes with the return; overpayments can be refunded or applied to the next year.

Step 6: Sign and Date

Form 940 requires the employer’s signature, not just a preparer signature. For corporations, an officer must sign. Unsigned returns are processed as late.

Common Errors Worth Avoiding

Credit reduction states: Don’t assume 0.6% without checking. Employers in credit reduction states pay a higher effective rate and need Schedule A (Form 940).

Misapplied wage caps: The $7,000 limit is per employee per year, not per quarter. Payroll software handles this automatically — manual spreadsheets often don’t.

State tax timing: To claim the 5.4% credit, SUTA taxes must be paid by the Form 940 due date. If you pay SUTA late, you lose part of the credit and owe more FUTA. That’s a painful penalty for a cash-flow timing issue.

Household employee threshold: The $1,500 quarterly wage test for regular employees differs from the $1,000 quarterly cash-wage test for household employees. Mixing them up causes either missed filings or unnecessary ones.

How Sagenext Helps

Firms running QuickBooks Desktop or payroll-integrated accounting software face a practical problem: the machine generating your FUTA reports is usually a single workstation that staff need to access during year-end crunch from wherever they happen to be.

Sagenext hosts QuickBooks Desktop (Pro, Premier, Enterprise), Sage 50, Sage 100, and major tax applications including Drake, Lacerte, ProSeries, and UltraTax on fully managed cloud infrastructure. Your payroll data, FUTA liability reports, and Form 940 prep work in the same hosted environment — accessible by multiple staff simultaneously from any device. Provisioning, data backups, security, and software updates are handled for you. If your team is reviewing Form 940 numbers across three locations the last week of January, that’s exactly what the platform is built for.

Key Takeaways

• FUTA is employer-only — never deduct it from employee wages.
• The gross rate is 6.0%; most employers net 0.6% after the 5.4% state credit, but credit reduction states pay more.
• File by February 2, 2026 for tax year 2025 (or February 10 if all deposits were timely).
• Deposit quarterly whenever cumulative FUTA liability exceeds $500 — don’t wait for year-end.
• Late filing triggers a 5% monthly penalty, capping at 25% of the unpaid tax.
• Household employers use the $1,000-per-quarter cash-wage threshold, not the $1,500 test.

Frequently Asked Questions

Who is required to file Form 940?

Any employer who paid $1,500 or more in wages in any calendar quarter, or who had at least one employee on any part of a day in 20 or more weeks during the current or prior year, must file Form 940. Household employers file if they paid $1,000 or more in cash wages in any calendar quarter. Both conditions apply to the current year or the year before.

What is the FUTA tax rate on Form 940?

The standard rate is 6.0% on the first $7,000 of each employee’s annual wages. Employers who paid state unemployment taxes in full and on time can claim a 5.4% credit, reducing the effective federal rate to 0.6%. Employers in credit reduction states receive a smaller credit and pay a higher net rate.

When are FUTA tax deposits due versus the Form 940 filing?

Form 940 is filed annually by January 31 (or the next business day if that falls on a weekend). Deposits, however, are required quarterly whenever your cumulative FUTA liability for the year exceeds $500. If the balance stays at $500 or below all year, you can pay it with the return instead of making quarterly deposits.

What happens if I file Form 940 late?

Late filing incurs a 5% monthly penalty on unpaid tax, up to a maximum of 25%. That’s separate from any interest charges. The safest move is to deposit on time during the year — if all deposits were made timely, you get an automatic extension to February 10 to file the return itself.

Can I e-file Form 940?

Yes. E-filing is faster, confirms IRS receipt immediately, and reduces transcription errors versus paper. Most payroll software and tax preparation platforms support direct e-filing of Form 940. If you file more than 10 information returns of any type in a calendar year, electronic filing is generally required.