940 Payroll Taxes: FUTA Wage Base, Deposits, and Filing

Form 940 is the annual return employers file to report payroll taxes owed under the Federal Unemployment Tax Act (FUTA). FUTA is paid entirely by the employer, never withheld from employee paychecks, and it funds the federal share of unemployment benefits. The statutory rate is 6.0% on the first $7,000 of wages per employee, but almost every employer qualifies for a 5.4% credit that drops the effective cost to 0.6%, or about $42 per employee per year.¹² The rest of the complexity is in the deposit rules, the state tax credit, and a handful of situations that push the rate up.

Who Has to File Form 940

You owe FUTA tax and must file Form 940 if either test applies in the current or preceding calendar year. The wage test: you paid at least $1,500 in total wages in any single calendar quarter. The employment test: you had at least one employee for some part of a day in 20 or more different calendar weeks. Meeting just one triggers filing for the year.¹

Two categories have different thresholds. Household employers become liable at $1,000 in cash wages in any calendar quarter.³ Agricultural employers become liable at $20,000 in cash wages in any calendar quarter, or at 10 or more farmworkers for some part of a day in 20 or more different weeks.⁴

The $7,000 Wage Base

FUTA tax applies only to the first $7,000 you pay each employee during the calendar year. Everything above that for the same employee is exempt. Your maximum FUTA tax per employee, before any credit, is $420 (6.0% of $7,000).¹

The $7,000 covers most pay: salaries, hourly wages, commissions, bonuses, and the cash value of other compensation. Federal law carves out several categories from the FUTA definition of wages: payments under an employer-established plan for sickness, accident disability, medical expenses, or death; employer contributions to qualified retirement and pension plans; dependent care assistance up to the statutory limit; the cost of group-term life insurance; and payments to independent contractors, who are not employees for FUTA purposes.⁴

Track each employee’s year-to-date wages carefully. Once an employee crosses $7,000 cumulative pay, you stop accruing FUTA on that employee for the rest of the year. For a business with mostly higher-paid workers, FUTA liability concentrates in the first quarter.

Calculating What You Owe

The 6.0% statutory rate is almost never what employers actually pay. If you pay your state unemployment tax on time, you get a credit of up to 5.4%, bringing your federal rate down to 0.6%.⁵ The full credit requires that all state unemployment contributions be paid by the Form 940 due date. Late state payments shrink the credit and raise your federal bill, which is one of the quieter ways a missed state deadline costs money.

Here is how the math works for a small business with five employees, each earning more than $7,000, in a state with no credit reduction:

Taxable wages per employee: $7,000
Total FUTA taxable wages: $7,000 × 5 = $35,000
Gross FUTA at 6.0%: $2,100
State credit at 5.4%: $1,890
Net FUTA owed: $210, or $42 per employee

If an employee earns only $5,000 during the year, use $5,000 rather than $7,000 as that employee’s FUTA taxable wages. The cap applies only when cumulative pay actually reaches $7,000.

Credit Reduction States

The 0.6% effective rate rises for employers in states that have borrowed from the federal government to pay unemployment benefits and haven’t repaid on time. When a state carries an outstanding federal loan balance on January 1 for two consecutive years and doesn’t repay by November 10 of the second year, the IRS reduces the FUTA credit for employers in that state.²

The reduction starts at 0.3% in the first year and grows by another 0.3% for each additional year the loan goes unpaid. A 0.3% reduction leaves you with a 5.1% credit instead of 5.4%, pushing the effective rate from 0.6% to 0.9%. On the same five-employee example, net FUTA would rise to $315, or $63 per employee.²

The IRS publishes the final list of credit reduction states each November. If you operate in one, you must complete Schedule A (Form 940) and report the additional tax. Check the IRS credit reduction page before filing; this is easy to miss, and the added cost per employee grows with each year a state stays on the list.

Quarterly FUTA Deposits

Form 940 is annual, but your payments may not be. At the end of each calendar quarter, check your cumulative FUTA liability for the year. If it exceeds $500, deposit the full accumulated amount by the last day of the following month.¹ The deadlines:

Q1 (January–March): April 30
Q2 (April–June): July 31
Q3 (July–September): October 31
Q4 (October–December): January 31 of the following year

If your running liability stays at $500 or less through the first three quarters, you can carry it forward and pay the full balance when you file Form 940. For small employers, this often means one payment at year-end rather than four deposits.

All FUTA deposits must be made electronically. Use the Electronic Federal Tax Payment System (EFTPS), your IRS business tax account, or IRS Direct Pay for businesses.¹ Paper checks aren’t an option. Missing a deposit deadline triggers penalties even when the annual return itself is on time.

Filing the Annual Return

Form 940 reconciles your full-year FUTA liability against the deposits already made. You report total wages, subtract amounts above the $7,000 cap and any exempt payments, apply your net rate (0.6% or higher if a credit reduction applies), and compare the result to deposits made during the year.

The standard filing deadline is January 31 of the year following the tax year, shifted to the next business day when it falls on a weekend or holiday. For the 2025 tax year, the due date is February 2, 2026, because January 31 is a Saturday. If you deposited all of your FUTA tax on time throughout the year, you get an automatic extension to February 10, 2026.⁶ Any remaining balance is due by the filing deadline and must be paid by electronic funds transfer. If deposits exceeded the actual liability, you can take a refund or apply the overpayment to the next year.

If you paid state unemployment tax in more than one state, or if any of those states are credit reduction states, you must complete Schedule A (Form 940) and attach it. Schedule A allocates taxable wages across states and feeds the additional tax calculation on line 11.⁶

Most employers can file Form 940 electronically through IRS-approved payroll software or submit a paper copy by mail. Certified professional employer organizations and Section 3504 agents filing aggregate returns are generally required to file electronically.⁷ For everyone else, electronic filing is encouraged but not mandatory as of the 2025 tax year.

Penalties for Missing a Deadline

The IRS applies separate penalties for missed deposits, late filing, and late payment, and they can stack.

Late deposit penalties scale with how far past the deadline the payment arrives:⁸

1–5 calendar days late: 2% of the unpaid deposit
6–15 calendar days late: 5%
16 or more days late: 10%
More than 10 days after an IRS notice demanding payment: 15%

These tiers replace each other rather than stacking. A deposit 20 days late draws a 10% penalty, not 2% plus 5% plus 10%.

Late filing of Form 940 brings a failure-to-file penalty of 5% of the unpaid tax per month or partial month overdue, capped at 25%.⁹ A separate failure-to-pay penalty of 0.5% per month runs on any balance still owed after the due date, also capped at 25%.¹⁰ Interest accrues on top at the federal short-term rate plus three percentage points, adjusted quarterly.¹¹

FUTA dollar amounts are usually small enough that penalties don’t become ruinous, but they’re also entirely avoidable. Set reminders for the quarterly deposit dates, and don’t let state unemployment payments slip, because a late SUTA payment quietly raises your federal bill by shrinking your credit.

Fixing a Return You Already Filed

Form 940 doesn’t have a dedicated correction form the way Form 941 has 941-X. To fix an error, file a fresh Form 940 with the “Amended Return” box checked in the upper-right corner. Complete the entire form with corrected figures. You can submit the amended return through the Form 940 e-file program or on paper.¹²

If the correction produces an overpayment and you want a refund, the general deadline is the later of three years from the original filing date or two years from the date you paid the tax.¹³ Miss that window and the overpayment is lost, so act on a discovered error promptly.

1
Internal Revenue Service. Topic No. 759, Form 940 – Filing and Deposit Requirements
2
Internal Revenue Service. FUTA Credit Reduction
3
Internal Revenue Service. Publication 926 – Household Employer’s Tax Guide
4
Office of the Law Revision Counsel. 26 U.S. Code 3306 – Definitions
5
Department of Labor, Employment and Training Administration. Unemployment Insurance Tax Fact Sheet
6
Internal Revenue Service. Instructions for Form 940 (2025)
7
Internal Revenue Service. 2025 Instructions for Form 940
8
Internal Revenue Service. Failure to Deposit Penalty
9
Internal Revenue Service. Failure to File Penalty
10
Internal Revenue Service. Failure to Pay Penalty
11
Internal Revenue Service. Quarterly Interest Rates
12
Internal Revenue Service. Correcting Employment Taxes
13
Internal Revenue Service. Time You Can Claim a Credit or Refund