IRS Form 940
IRS Form 940: Employer's Annual Federal Unemployment (FUTA) Tax Return Guide for 2026
Form 940 is the annual federal unemployment tax return that employers file with the IRS to report FUTA tax liability for the calendar year. FUTA (Federal Unemployment Tax Act) tax funds state unemployment insurance programs that provide benefits to workers who lose their jobs. Unlike payroll taxes withheld from employee paychecks, employers alone pay FUTA tax employees do not contribute. Filing Form 940 accurately and on time ensures compliance with federal unemployment tax requirements.
Understanding FUTA Tax and Who Must File
The Federal Unemployment Tax Act requires employers to file Form 940 if they paid $1,500 or more in wages during any calendar quarter in the current or prior year, or if they had at least one employee working for any part of a day in 20 or more different weeks. Form 940 is filed annually, not quarterly like Form 941. The FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee during the calendar year.
Most employers receive a federal tax credit of up to 5.4% for state unemployment taxes when those taxes are paid in full and on time in accordance with IRS requirements, reducing the effective FUTA rate to 0.6%. This maximum credit generally applies only under these conditions. Employers in credit-reduction states (states with outstanding federal loans) pay a higher effective rate and must file Schedule A (Form 940).
Household employers generally report FUTA tax on Schedule H (Form 1040) rather than Form 940, provided they meet the applicable filing requirements and paid cash wages of $1,000 or more in any calendar quarter. Agricultural employers may be required to file Form 943 for federal income tax withholding and employment taxes, while Form 940 may also apply if FUTA filing requirements are met. Seasonal employers still must file Form 940 for their business year even if they only operate part of the year.
Form 940 Due Dates and Filing Deadlines for 2026 Tax Year
Form 940 for the 2025 tax year was due February 2, 2026. For the 2026 tax year, Form 940 is generally due January 31, 2027. Because January 31, 2027 falls on a Sunday, the filing deadline automatically shifts to Monday, February 1, 2027. Employers who deposited all required FUTA tax on time and in full during 2026 receive an automatic extension to February 10, 2027.
FUTA tax deposits are made quarterly, not annually. Employers must monitor their cumulative FUTA liability throughout the year under the $500 rule. Quarterly deposits are due by the last day of the month following each quarter: Q1 deposits by April 30, Q2 by July 31, Q3 by October 31, and Q4 by January 31 of the following year. If cumulative FUTA liability in a quarter is $500 or less, it carries forward to the next quarter rather than requiring a deposit.
Electronic filing is recommended and provides faster processing and electronic confirmation of receipt. Form 940 can also be filed by mail, though paper filings take longer. Many payroll software providers can help prepare Form 940 and support electronic filing, depending on the features and services included in your plan.
Form 940 Structure: What You Need to Report
Part 1 of Form 940 contains basic business information including your Employer Identification Number (EIN), business name, and address. Ensure the EIN matches IRS records exactly, as incorrect identification numbers can delay processing. This section also asks whether your business is open, closed, or being transferred. Part 2 covers your FUTA tax calculation and deposit reconciliation.
The form requires you to report total wages paid to employees and calculate your FUTA tax on the first $7,000 of each employee's annual wages. You deduct your state unemployment tax credit (typically 5.4%) to arrive at your net federal tax liability. Line 11 is where you report your total FUTA tax before adjustments and credits.
If your business operated in multiple states or if you operated in a credit-reduction state, you must file Schedule A (Form 940) with your annual return. Schedule A tracks FUTA wages and taxes by state, allowing the IRS to apply the correct credit-reduction percentage to each state's wages. Employers in non-credit-reduction states who only operate in one state can omit Schedule A.
Part 3 of Form 940 reconciles your quarterly tax deposits against your total annual FUTA liability. Lines 16a through 16d break down your total FUTA tax by quarter, helping the IRS verify that deposits arrived in the correct quarters. Balance due or overpayment appears at the end of the return.
Common Form 940 Filing Errors and How to Avoid Them
Incorrect wage base calculations are the most frequent error. Many employers forget that the $7,000 wage base applies to each individual employee, not total payroll. If an employee earns $10,000 in a year, you calculate FUTA only on $7,000 of that amount. Professional payroll services can help ensure wages are correctly tracked.
Late state unemployment tax payments reduce your federal credit and increase FUTA liability. If state unemployment taxes are paid after the Form 940 deadline, you lose the 5.4% credit and must report the adjustment on line 10 with a worksheet. Maintaining a calendar of state UI payment deadlines prevents this costly mistake.
Missing Schedule A when required is a common oversight. Even single-state employers must file Schedule A if their state appears on the annual credit-reduction state list published each November. The IRS identifies credit-reduction states by November 10 based on each state's loan repayment status. Failing to attach Schedule A when required triggers IRS notices.
Schedule A errors occur when employers in multiple states allocate wages incorrectly by state. Each state gets its own line showing that state's FUTA wages and the applicable credit-reduction rate. Review your Form 940 carefully to ensure state allocation matches your actual wage distribution.
Quarterly FUTA Deposits: Understanding the $500 Rule
The $500 rule determines when employers must make FUTA deposits. Throughout the year, monitor your cumulative FUTA tax liability quarter by quarter. When cumulative liability exceeds $500 at the end of any quarter, you must deposit the full amount by the last day of the month following that quarter.
If cumulative FUTA at the end of Q1 is $300, no deposit is due. If Q2 cumulative reaches $600, you must deposit the full $600 by July 31. This differs from Form 941, which uses monthly or semiweekly deposit schedules. FUTA deposits follow a cumulative quarterly pattern with the $500 threshold.
If annual FUTA liability stays at or below $500 for the entire year, no quarterly deposits are required. You can pay the full amount with Form 940 when filing in February. This simplifies compliance for very small employers with minimal payroll tax obligations.
Deposits must be made electronically using EFTPS (Electronic Federal Tax Payment System) or other IRS-approved payment methods. Employers cannot mail FUTA deposits by check; all deposits must be made electronically. Keep detailed records of all quarterly deposits to reconcile against your Form 940 when filing.
State Unemployment Tax Credit and Credit-Reduction States
The maximum FUTA credit of 5.4% depends on two conditions: you must pay your state unemployment taxes in full and by the Form 940 filing deadline. If either condition fails, you lose part or all of the credit. State unemployment tax (SUTA) payment receipts should be retained to document timely payment.
Credit-reduction states are states with outstanding federal unemployment loans that haven't been repaid by November 10. Each year, the U.S. Department of Labor publishes the list of states facing a credit reduction for the following tax year. Employers in these states pay a higher effective FUTA rate because their federal credit is reduced.
For example, if a state faces a 0.3% credit reduction, employers there receive a 5.1% credit (5.4% minus 0.3%) instead of the standard 5.4%. This raises the effective FUTA rate to 0.9% instead of 0.6% for wages paid in that state. The Department of Labor identifies credit-reduction states annually based on each state's loan repayment status.
Multi-state employers must calculate credit reductions separately for each state where they paid wages. Schedule A (Form 940) allocates wages by state and applies each state's credit-reduction percentage. Single-state employers in credit-reduction states still file Schedule A to ensure the correct reduction is applied.
State Unemployment Tax (SUTA) and Form 940
Form 940 reports only federal FUTA tax. State unemployment taxes are paid separately to each state's unemployment insurance agency on state-specific forms and schedules. Your FUTA credit on Form 940 depends on timely SUTA payment, but SUTA is not reported on Form 940 itself.
Employers must maintain separate records for federal FUTA and state SUTA compliance. Missing either deadline creates problems: late SUTA payments reduce your federal credit, while late FUTA deposits trigger federal penalties. Using a unified payroll system that tracks both federal and state obligations helps prevent these errors.
If you operate in multiple states, each state has its own SUTA deadlines and requirements. Federal Form 940 reconciles your FUTA liability, but you must also file state unemployment tax returns. Professional payroll services manage both federal and state filings together.
Frequently Asked Questions About Form 940
Do I need to file Form 940 if I'm a sole proprietor?
Yes, if you paid $1,500 or more in wages to employees during any quarter or had employees for 20 or more different weeks, you must file Form 940 even as a sole proprietor. Self-employment income does not trigger FUTA filing; only employee wages do.
What is Schedule A and when is it required?
Schedule A (Form 940) is generally required if you paid wages in more than one state or if you paid wages in a credit-reduction state. Single-state employers in non-credit-reduction states can skip Schedule A. The IRS publishes the credit-reduction state list each November based on states' loan repayment status.
How do I calculate FUTA tax for an employee who earned more than $7,000?
Calculate FUTA only on the first $7,000 of each employee's annual wages, regardless of how much they earned. If an employee earned $15,000, multiply only $7,000 by 6.0% to get gross FUTA tax, then apply your state credit.
Can I get an extension to file Form 940?
No automatic extension is available for Form 940 itself. However, if you deposited all required FUTA tax on time and in full, your filing deadline automatically extends from January 31 to February 10. This is the only available relief.
What if my business closed during the year?
If your business closed or you stopped paying wages, check the appropriate box on Form 940 and file by the normal deadline. Form 940 should still be filed even if you closed mid-year, reporting only the wages paid before closure.
What happens if I file Form 940 late
Late filing triggers a penalty of 5% of the unpaid FUTA tax for each month (or partial month) the return is late, up to a maximum of 25%. A minimum late-filing penalty applies if the return is filed more than 60 days late; penalty amounts are adjusted periodically for inflation.
How does FUTA relate to Form 941?
Form 941 reports quarterly payroll taxes (federal income tax withholding, Social Security tax, and Medicare tax). Form 940 reports annual federal unemployment tax. Both forms reconcile your deposits against your tax liability, but they cover different employment taxes and use different deposit schedules. Most employers must file both forms.
Can state unemployment tax paid late affect my Form 940?
Yes. If state unemployment taxes are paid after the Form 940 deadline, you lose the 5.4% credit and must report the reduction on line 10 with a worksheet. This increases your effective FUTA rate. Late state payments have no bearing on FUTA deposit deadlines—only on your credit calculation.
Karme: Your Form 940 Compliance Partner for 2026
Karme is a Texas financial services firm specializing in tax preparation, business solutions, and payroll tax compliance for small business owners. Rather than manually calculating FUTA liability and tracking quarterly deposits, Karme works alongside your payroll records to help manage federal unemployment tax obligations.
We monitors quarterly FUTA liability, tracks the $500 deposit threshold, and alerts you when deposits are due. Karme's business tax experts ensure Form 940 accounts for state-specific credit reductions and that Schedule A is filed correctly when required. Whether you operate in one state or multiple states, Karme simplifies FUTA compliance.
Karme combines tax preparation, bookkeeping solutions, business consulting, and financial planning under one platform. Their team manages employment tax compliance so you can focus on growing your business instead of managing complex unemployment tax calculations. Karme serves businesses nationwide through secure digital systems and in-person consultations at multiple Texas locations.
Source References
- IRS Topic 759: Form 940 – FUTA Tax Return
https://www.irs.gov/taxtopics/tc759 - IRS Official Form 940 Instructions (2025)
https://www.irs.gov/instructions/i940 - About Form 940 – IRS
https://www.irs.gov/forms-pubs/about-form-940 - Form 940 2026 Filing Guide and Deadlines
https://www.taxzerone.com/resources/employment-tax/irs-form-940-due-dates/ - Form 940 FUTA Tax Return: 2026 Updates and Quarterly Deposits
https://onpay.com/insights/form-940-instructions/ - The Form 940: Complete Employer's Guide to FUTA Tax Returns
https://www.usegoodform.com/blog/form-940 - Form 940 FUTA Tax: Rates, Credits, and Filing Requirements
https://accountably.com/irs-forms/f940/
Important Disclaimer
This content is for informational purposes only and should not be considered legal or tax advice. Tax laws and IRS regulations change frequently and may vary based on your specific business situation. Small business owners, contractors, and employers should consult with a qualified tax professional, accountant, or the IRS directly for guidance specific to their circumstances before making tax filing decisions.