What Is Form 940 For? FUTA Filing, Deposits, and Penalties

Form 940 is the annual return employers file with the IRS to report and pay tax under the Federal Unemployment Tax Act (FUTA). Only employers owe this tax; it is never withheld from employee pay. The statutory rate is 6% on the first $7,000 of wages paid to each employee during the calendar year, but most employers pay an effective rate of 0.6% after applying a credit for state unemployment tax contributions.¹

What FUTA Tax Pays For

FUTA is an excise tax imposed on employers by 26 U.S.C. § 3301. It applies to the first $7,000 in wages paid to each employee during a calendar year, an amount known as the FUTA wage base. Once an employee’s year-to-date wages cross that threshold, no additional FUTA tax is owed on that employee for the rest of the year.²

The gross rate is 6%. Employers who pay their state unemployment taxes on time receive a credit of up to 5.4% against the federal tax, which brings the effective FUTA rate down to 0.6% for most employers, or $42 per employee per year on the full $7,000 wage base.³ To claim the full credit, state unemployment tax payments must be made by the Form 940 filing deadline.⁴

FUTA revenue does not pay unemployment benefits directly. It covers the administrative costs of running state unemployment programs and funds federal loans to states whose unemployment trust funds run low. The state unemployment taxes you pay separately are what actually fund benefits to out-of-work individuals.

Who Has to File

You must file Form 940 if you meet either of two tests during the current or preceding calendar year:⁵

You paid wages of $1,500 or more to employees in any single calendar quarter.
You had at least one employee for some part of a day in any 20 or more different weeks. The weeks do not need to be consecutive, and the employee does not have to be the same person each week.

Meeting either test, not both, triggers the filing requirement.

Household and Agricultural Employers

Different thresholds apply to two categories. If you employ household workers such as nannies, housekeepers, or home health aides, you file Form 940 if you paid cash wages of $1,000 or more in any calendar quarter.⁵ Agricultural employers face a higher bar: you file only if you paid $20,000 or more in cash wages to farmworkers in any calendar quarter, or if you employed 10 or more farmworkers during some part of a day in 20 or more different weeks.²

Section 501(c)(3) Organizations

Organizations tax-exempt under Section 501(c)(3), including charities, religious organizations, and educational institutions, are exempt from FUTA entirely. Service performed for a 501(c)(3) is excluded from the definition of employment under the statute, so these organizations do not file Form 940.⁶ Other tax-exempt entities, such as 501(c)(4) or 501(c)(6) organizations, do not receive this exemption and must file like any other employer if they meet the thresholds above.

Calculating the Tax

Form 940 walks you through a straightforward calculation. Start with total payments to all employees, subtract exempt payments and wages above the $7,000 per-employee cap, and multiply the remaining taxable wages by the applicable rate.⁴

Total payments. Report all compensation paid during the calendar year, including salaries, hourly wages, commissions, bonuses, vacation pay, and the value of non-cash fringe benefits. Include full-time, part-time, and temporary employees.

Exempt payments. Certain payments come out of the FUTA wage base. Common examples include employer contributions to qualified retirement plans such as 401(k)s, contributions to accident or health plans, and group-term life insurance costs. Dependent care assistance is exempt up to $7,500 per employee ($3,750 for a married employee filing separately) for 2026, and educational assistance is exempt up to $5,250 per employee per year.⁷ Qualified transportation benefits, transit passes and qualified parking, are each exempt up to $340 per month for 2026.⁸

Excess wages. For each employee whose total non-exempt wages exceeded $7,000, subtract the amount above that cap. Only the first $7,000 per employee is taxable.

Apply the rate. Multiply remaining taxable wages by 0.006 for the standard 0.6% net rate after the full 5.4% state credit. If you operated in a credit reduction state, the rate is higher and you use Schedule A (Form 940) to calculate the extra amount.

Credit Reduction States

When a state borrows from the federal government to pay unemployment benefits and fails to repay those loans within the allowed timeframe, it becomes a credit reduction state. Employers there lose part of the standard 5.4% credit, which raises their effective FUTA rate.⁹

The reduction starts at 0.3% for the first year a state qualifies and grows by an additional 0.3% for each subsequent year the loan remains unpaid. For tax year 2025, California had a credit reduction of 1.2%, and the U.S. Virgin Islands had a reduction of 4.5%.¹⁰ A California employer paid an effective FUTA rate of 1.8% that year rather than 0.6%.

If you paid wages subject to unemployment tax in a credit reduction state, or operated in more than one state, complete Schedule A (Form 940) and attach it to your return. The IRS publishes the list of affected states each November, so check before filing.

Quarterly Deposits and the Annual Filing Deadline

Form 940 is filed once a year, but you may need to deposit FUTA tax quarterly. At the end of each quarter, add your FUTA liability for that quarter plus any amount carried over from an earlier quarter. If the total reaches $500 or more, deposit the full amount by the last day of the month following the quarter’s end:¹¹

First quarter (January to March): deposit by April 30
Second quarter (April to June): deposit by July 31
Third quarter (July to September): deposit by October 31
Fourth quarter (October to December): deposit by January 31, or pay with your Form 940

If your quarterly liability stays under $500, carry it forward. Deposits go through the Electronic Federal Tax Payment System (EFTPS), which is free and available at eftps.gov.¹²

The annual return is due January 31 following the end of the tax year. When that date falls on a weekend or holiday, the deadline shifts to the next business day; for tax year 2025, the due date is February 2, 2026.⁵ If you deposited all FUTA tax on time throughout the year, you get an extra ten days, until February 10, to file. You can file electronically through the IRS Modernized e-File (MeF) system, either directly or through an authorized e-file provider, and electronic returns receive acknowledgment within 24 hours. Paper filers use the address in the Form 940 instructions for their state and include Form 940-V with any check or money order.¹³

Penalties for Filing, Paying, or Depositing Late

The IRS imposes separate penalties for failing to file, failing to pay, and failing to deposit.

A late-filed return triggers a penalty of 5% of the unpaid tax for each month or partial month the return is overdue, up to 25%. This applies unless you can show reasonable cause. A separate failure-to-pay penalty of 0.5% per month, also capped at 25%, applies to any tax shown on the return but not paid by the due date.¹⁴

Late or missed quarterly deposits carry tiered penalties under a separate provision:¹⁵

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

These percentages do not stack. A deposit 12 days late draws a 5% penalty, not 7%. Keep all employment tax records for at least four years after the filing due date in case of an audit.¹⁶

1
Office of the Law Revision Counsel. 26 USC 3301 Rate of Tax
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Office of the Law Revision Counsel. 26 USC 3306 Definitions
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Office of the Law Revision Counsel. 26 USC 3302 Credits Against Tax
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Internal Revenue Service. Instructions for Form 940 (2025)
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Internal Revenue Service. Instructions for Form 940 (2025) – Section: Who Must File Form 940
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Internal Revenue Service. Exempt Organizations What Are Employment Taxes
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Internal Revenue Service. Publication 15-B (2026) Employers Tax Guide to Fringe Benefits
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Internal Revenue Service. Publication 15-B (2026) Employers Tax Guide to Fringe Benefits
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Internal Revenue Service. FUTA Credit Reduction
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Federal Register. Notice of the Federal Unemployment Tax Act FUTA Credit Reductions Applicable for 2025
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Internal Revenue Service. Employment Tax Due Dates
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Internal Revenue Service. E-File Employment Tax Forms
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Internal Revenue Service. Modernized e-File MeF for Employment Taxes
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Office of the Law Revision Counsel. 26 USC 6651 Failure to File Tax Return or to Pay Tax
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Internal Revenue Service. Failure to Deposit Penalty
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Internal Revenue Service. Employment Tax Recordkeeping