Most payroll taxes get split between you and your workers. This one does not. Unlike the tax deductions withheld from worker paychecks, the federal unemployment tax comes entirely out of the employer's pocket, and the form is how you report it once a year.
Tax form 940 is short, but it has a few sharp edges. The rate looks tiny until a credit gets reduced, the due date moves when January 31 lands on a weekend, and one box on Schedule A can change what you owe. Consider this your plain-English guide to Form 940: how it works, who has to file, and the numbers that matter for the current return.
Form 940 is the Employer's Annual Federal Unemployment (FUTA) Tax Return, the tax form you use to report and reconcile FUTA tax for the year.
You file it once a year with the Internal Revenue Service, even though you often pay the tax in quarterly deposits along the way. Think of the 940 form as the annual settle-up: it adds your total FUTA tax, subtracts the tax payments you already made through the year, and shows whether you still owe or overpaid on this annual tax. The 940 tax form is simply where that reconciliation lives. The official name is a mouthful, but it spells out exactly what the document is, an employer's annual federal unemployment tax return.
FUTA is a federal tax that keeps the unemployment safety net solvent.
The Federal Unemployment Tax Act created a joint federal and state system that pays state unemployment benefits to people who lost their jobs through no fault of their own. Your FUTA dollars flow to the federal side, which covers administration and backstops the states, while the state unemployment tax you pay funds the actual checks through state unemployment insurance programs. When you hear that unemployment is "employer-funded," this is the machinery behind it. Workers never see federal unemployment taxes come out of their pay, because the tax is yours alone to carry.
Most businesses with employees have to file, and the bar is low.
Under the general test, you have to file the return if you paid wages of $1,500 or more in any calendar quarter, or if you had at least one employee for some part of a day in 20 or more different weeks during the year. Hit either mark and your business is subject to FUTA, which sweeps in the large majority of small businesses, and you need to file. Paying wages above that quarterly floor is the trigger most owners hit first. Household and farm employers follow their own separate thresholds.
A few organizations are exempt. Services performed for a state or local government are exempt from federal unemployment tax, and registered 501(c)(3) nonprofits are exempt from FUTA tax as well, so neither files the return for that work. If you are unsure whether a worker counts, the safer move is to check before you skip the filing, because the penalty for guessing wrong runs in the wrong direction.
This is where the math surprises people, because the headline rate and the real rate are far apart.
FUTA runs at 6.0% on the first $7,000 of wages paid to each worker for the year. That $7,000 wage base has not moved since 1983. On its own, 6% would be $420 per worker, but almost nobody pays that. Most businesses receive a credit of 5.4% for the state tax they pay on time, which drops the net tax rate to just 0.6%. At that effective FUTA rate, you owe about $42 per worker a year, the figure you reach after the tax before adjustments meets the credit of 5.4%.
So the working numbers are simple. A tax rate of 0.6% on $7,000 in annual wages, capped per worker, is the baseline almost every compliant business lands on.
Here is the catch that trips up multi-state businesses, and it changes year to year.
When a state borrows from the federal government to pay unemployment benefits and does not repay the loan in time, it becomes a credit reduction state. The reduction is the IRS clawing back part of your credit. Employers there do not receive a credit for the full 5.4%, so their FUTA credit shrinks and the effective rate climbs above 0.6%. For the 2025 tax year, two jurisdictions are on the list: California, at 1.2%, and the U.S. Virgin Islands, at 4.5%. A California business therefore pays roughly 1.8% rather than 0.6%, about $84 more per worker, and the territory's figure is steeper. New York and Connecticut were both projected to land there but repaid their loans before the November 10 deadline, so their unemployment taxes paid kept the full credit this year.
If you paid wages in one of these states, you flag it on Schedule A (Form 940) and carry the extra amount onto the return. Miss that step and you underpay, which is exactly the kind of error the IRS catches.
The deadline is annual, but the money often is not.
The return is due January 31 after the close of the tax year. Because January 31, 2026, falls on a Saturday, the form 940 due date for the 2025 return is February 2, 2026 (January 31 is a Saturday). If you deposited all your FUTA tax on time, you get a grace period until February 10. As for paying, the trigger is $500: if your FUTA tax liability for a quarter is more than that, the amount must be paid as a deposit by the end of the following month. If a quarter comes in at $500 or less, you roll it forward and pay the tax due later. Most businesses e-file Form 940 and make FUTA payments as tax deposits through the federal EFTPS system, and you will need your employer identification number on everything you submit. Paying your FUTA taxes on time is also what protects the full credit, so the deadlines are not just paperwork.
People mix these two up constantly, and the difference is worth nailing down.
Form 941 is the quarterly payroll tax return that reports federal income tax withheld from wages plus Social Security and Medicare. The 940 is the annual return for federal unemployment tax only. One is filed four times a year and splits its cost between you and your employees, the other is filed once and is yours alone. Confusing them is a common slip, especially for a new business sorting out its payroll calendar for the first time.
Mistakes happen when filing your taxes, and the form has a built-in way to fix them.
If you already filed and need to correct something, you submit another Form 940 with the amended box checked under the type of return section, rather than starting from scratch. Filing an amended return is routine, but it is cleaner to get the original right. The slips a tax preparer sees most often are missing a reduced-credit state, defaulting to the 0.6% rate when a higher one applies, and forgetting that timely state payments are what earn your FUTA tax credits in the first place. Paying FUTA late quietly raises the bill.
The return is low-stakes when payroll data is clean and high-stakes when it is not.
The return is only as accurate as the wage records, the payments made to each state, and reduced-credit flags feeding it, and for a firm running many clients across many states, that reconciliation is where time disappears every January. This is repeatable, deadline-bound work, exactly what an experienced offshore partner is built to own. Madras Accountancy supports U.S. CPA firms with this kind of payroll and federal unemployment tax work, from reconciling FUTA wages to checking each client's state against the current credit reduction list before the return goes out. Clean books are what keep a simple form simple and steer clear of the usual slips.
Handled early, the 940 is a quick annual filing. Handled late, it is a credit you lost and a notice you did not need.
It is the tax form used to report and pay FUTA, which funds unemployment benefits for workers who lost their jobs. Businesses use Form 940 once a year for this. It is filed once a year, separate from the quarterly payroll tax returns.
You have to file if you paid $1,500 or more in wages in any quarter, or had an employee for 20 or more different weeks in the year. That covers most small businesses. Government employers and 501(c)(3) nonprofits are generally outside FUTA and do not file.
The FUTA rate is 6.0% on the first $7,000 of each employee's wages. Most businesses get a credit of up to 5.4% for state unemployment tax paid on time, which lowers it to an effective 0.6%, or about $42 per employee a year.
The return is due February 2, 2026, since January 31, 2026, falls on a Saturday. If you deposited all your FUTA tax on time during the year, the due date extends to February 10, 2026.
It is a state that borrowed from the federal unemployment fund and did not repay on time, so businesses there lose part of the 5.4% credit and owe more FUTA. For the current tax year, California (1.2%) and the U.S. Virgin Islands (4.5%) are on the list.
You deposit FUTA electronically through EFTPS when your quarterly tax liability exceeds $500. If a quarter is $500 or less, you carry it forward. Any tax due is paid with the return by the due date, and you can e-file Form 940 directly.
The 940 is the annual return for federal unemployment tax, paid only by the employer. Form 941 is the quarterly return for federal income tax withholding plus Social Security and Medicare, which is split between employer and employee. They are different forms for different taxes.
You file a 940 again, with the amended box checked in the type of return section, using the form for the year you are correcting. Filing an amended return lets you fix wages, the reduced-credit amount, or the tax before adjustments without redoing your other payroll filings.
This is general information about the 940 and FUTA tax, not tax advice for a specific situation. Rates, due dates, and the list of affected states can change each year, so confirm the current details with the IRS Form 940 instructions or a qualified tax professional before filing.
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