Form 940 Instructions: Filing, Deposits, and Corrections

Form 940 is the annual return employers use to report and pay federal unemployment tax under FUTA, and these Form 940 instructions walk through who files, how to calculate the tax, when to deposit during the year, and when to send the return. The tax is paid entirely by the employer, never withheld from employee pay. For 2025 returns filed in 2026, the gross FUTA rate is 6% on the first $7,000 of wages paid to each employee, but most employers pay an effective 0.6% after the state unemployment credit.¹

Who Has to File

You must file Form 940 if you meet either of two tests. First, a wage test: you paid $1,500 or more in wages during any calendar quarter of the current or prior year. Second, an employment duration test: you had at least one employee for any part of a day in 20 or more different calendar weeks during the current or prior year. The weeks don’t have to be consecutive, and the employee doesn’t have to be full-time.²

Meeting one test is enough. A seasonal business that pays $1,500 in a single quarter but never has an employee for 20 weeks still files.

Agricultural and Household Employers

Farm and domestic work use different thresholds. Agricultural employers file if they paid $20,000 or more in cash wages to farmworkers in any single quarter, or employed 10 or more farmworkers during some part of a day in 20 or more different weeks. Household employers file if they paid $1,000 or more in cash wages for domestic services in any calendar quarter.³

Employers That Don’t File

State and local governments and their wholly owned instrumentalities are excluded from FUTA. So are services performed for Indian tribal governments that stay current on state unemployment obligations, and organizations described under Section 501(c)(3) of the Internal Revenue Code. The 501(c)(3) exemption is automatic and cannot be waived, and it does not extend to organizations tax-exempt under a different subsection.⁴

Calculating What You Owe

The gross rate is 6% on the first $7,000 of wages paid to each employee during the calendar year.⁵ Once an employee’s cumulative wages pass $7,000 for the year, additional wages for that person are no longer subject to FUTA. Maximum gross liability is $420 per worker.

Before applying the rate, subtract payments that don’t count as FUTA wages. The statute excludes employer contributions to qualified retirement plans (401(a), 403(b), and SEPs), payments under employer health and accident plans, employer-provided dependent care assistance, and benefits provided through a Section 125 cafeteria plan.² Group-term life insurance coverage up to $50,000 is also excluded.⁶

The 5.4% State Credit

If you paid your state unemployment taxes on time, you receive a credit of up to 5.4% against the federal rate. That drops your effective FUTA rate to 0.6% and your maximum federal tax per employee to $42 per year.¹ The credit maxes out at 5.4% regardless of the actual rate your state charges.

Schedule A and Credit Reduction States

Complete Schedule A (Form 940) if you paid FUTA-taxable wages in more than one state, or if you paid wages in a state with a FUTA credit reduction.⁷

A credit reduction happens when a state borrows from the federal unemployment trust fund and doesn’t repay within two years. Employers in those states lose part of the 5.4% credit, so their effective federal rate rises. The reduction grows the longer the debt is outstanding, and the final list for a given year isn’t set until November 10 of that year. Check the state list close to filing time.⁸

On Schedule A, check the box for every state where you paid unemployment taxes and enter the credit reduction rate for any affected state. The additional tax flows through to your Form 940 total.⁹

Depositing FUTA During the Year

You don’t wait until you file to pay. If your cumulative FUTA liability exceeds $500 in any quarter, deposit that tax by the last day of the month following the quarter’s end.¹⁰

First quarter (January–March): deposit due April 30
Second quarter (April–June): deposit due July 31
Third quarter (July–September): deposit due October 31
Fourth quarter (October–December): deposit due January 31

If a quarter’s liability is $500 or less, carry it forward and add it to the next quarter. Keep rolling until the cumulative amount exceeds $500, then deposit for that quarter. If it never tops $500 for the entire year, you can pay the full amount when you file, or by the return’s due date.¹⁰

Deposits over $500 must be made electronically through EFTPS, IRS Direct Pay, or your IRS business tax account.¹¹

Filing the Return

The standard deadline is January 31 following the end of the tax year. When that date falls on a weekend or holiday, it shifts to the next business day. For 2025 returns, the IRS instructions set the due date at February 2, 2026.³

If you deposited all FUTA tax on time throughout the year, you get 10 extra calendar days to file the return. For 2025 returns, that extended deadline is February 10, 2026.¹²

You can file on paper or electronically. Paper filers mail the return to the address in the instructions, which varies by state and by whether you’re including a payment. Electronic filing through IRS-approved software is faster and produces immediate confirmation of receipt. Download the current year’s form directly from IRS.gov so you’re working from the right version.

Paying a Balance Due

If you owe a balance on your filed return, electronic payment through EFTPS is required whenever deposits exceed $500, and it’s the simplest route for any amount.¹¹

If you pay by check or money order, include Form 940-V (the Payment Voucher) with your mailing so the IRS credits your employer account correctly. Keep a copy of the check and the postmarked envelope as proof of timely payment.¹¹

Penalties and Interest

Three penalties can apply to Form 940, and they stack.

Failure to File

Filing late costs 5% of the unpaid tax for each month or partial month the return is overdue, up to 25%.¹³

Failure to Pay

File on time but don’t pay in full, and 0.5% per month applies to the unpaid balance, also capped at 25%. When both penalties run in the same month, the filing penalty is reduced by the payment penalty amount, so you aren’t double-charged for the overlap.¹⁴

Failure to Deposit

Missing a quarterly deposit deadline carries its own tiered penalty:

1 to 5 days late: 2% of the undeposited amount
6 to 15 days late: 5%
More than 15 days late: 10%
Still unpaid 10 days after the first IRS notice: 15%

A separate 10% penalty applies if you were required to deposit electronically but used another method.¹⁵

Interest

Interest runs on any unpaid tax from the due date until the balance is paid. The IRS sets rates quarterly. For 2026, the underpayment rate is 7% for the first quarter and 6% for the second quarter.¹⁶

Correcting a Return You Already Filed

If you find an error after filing, correct it by filing another Form 940 with the “Amended” box checked in the Type of Return section. There’s no separate form number, and amended returns can be filed electronically.³ Common reasons include missed wages, an incorrect state unemployment credit, or reclassified workers. Voluntary corrections are treated more favorably than adjustments the IRS finds in an audit, so file the amended return as soon as you catch the mistake.

Records to Keep

Hold employment tax records for at least four years after filing the fourth-quarter return for the year. Records should include total wages paid to each employee, the portion subject to FUTA, your state unemployment contributions, and any amounts claimed as credits. These must be available if the IRS asks for them.¹⁷ Four years is the floor; if the statute of limitations is still open on an underpayment, keeping records longer protects you if a dispute arises.

1
Employment & Training Administration. Unemployment Insurance Tax Topic
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Office of the Law Revision Counsel. 26 USC 3306 – Definitions
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Internal Revenue Service. Instructions for Form 940
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Internal Revenue Service. Exempt Organizations – What Are Employment Taxes
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Office of the Law Revision Counsel. 26 USC 3301 – Rate of Tax
6
Internal Revenue Service. Group-Term Life Insurance
7
Internal Revenue Service. FUTA Credit Reduction
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Employment & Training Administration. FUTA Credit Reductions
9
Internal Revenue Service. Instructions for Schedule A (Form 940) for 2025
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Internal Revenue Service. Topic No. 759 – Form 940 Filing and Deposit Requirements
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Internal Revenue Service. Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return
12
Internal Revenue Service. Employment Tax Due Dates
13
Internal Revenue Service. Failure to File Penalty
14
Internal Revenue Service. Failure to Pay Penalty
15
Internal Revenue Service. 20.1.4 Failure to Deposit Penalty
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Internal Revenue Service. Quarterly Interest Rates
17
Internal Revenue Service. Employment Tax Recordkeeping