Your annual federal unemployment tax.
Form 940 reports federal unemployment tax, or FUTA, which funds unemployment benefits. It is paid by the employer, never withheld from employees, and it is filed once a year. The headline rate looks large, but a credit for the state unemployment tax you already pay brings the effective rate down sharply. We calculate it, apply the credit, and file on time.
A tax you pay, not one you withhold.
Form 940 is the Employer's Annual Federal Unemployment Tax Return. The FUTA tax it reports funds the federal side of the unemployment benefits system. Two features set it apart from your other payroll filings. First, it is entirely an employer tax; unlike Social Security, Medicare, and income tax withholding, nothing comes out of the employee's paycheck. Second, it is filed once a year rather than quarterly. The rate looks steep at first, but because you also pay state unemployment tax, a credit for that reduces the federal rate substantially for most employers.
So what does the filing actually compute? Here it is.
The FUTA calculation, after the state credit.
Form 940 applies the federal unemployment rate to the first portion of each employee's annual wages, then reduces it by the credit for state unemployment tax you paid on time. For most employers who have paid their state unemployment tax in full and by the deadline, that brings the effective federal rate down to a small fraction of the headline number. The return computes the year's FUTA liability, accounts for any deposits already made, and shows the remaining balance. We calculate it, apply the correct credit, and e-file.
Not every business owes FUTA. Here is who files.
Employers who pay wages above a small threshold.
FUTA applies once your payroll passes a modest level. Here is the line.
File Form 940 if
- You paid wages of 1,500 dollars or more in any calendar quarter.
- Or you had one or more employees for part of a day in twenty or more different weeks.
- You are a standard employer with W-2 employees.
- The threshold is measured across the current or prior year.
This is a different filing if
A rate detail worth knowing: the credit that lowers the federal rate depends on paying your state unemployment tax in full and on time. In addition, some states are designated credit-reduction states because they borrowed from the federal unemployment fund and have not repaid it, and employers in those states receive a smaller credit, which raises their effective FUTA rate. We check your state's status each year so your 940 reflects the correct rate rather than assuming the standard one.
Threshold met? Here are the rate, dates, and penalties.
Small rate, specific rules.
These figures were verified against current IRS guidance. The credit-reduction status changes by state and year.
Rate confirmed? Here is how the filing runs.
Deposit through the year, reconcile at year-end.
FUTA accumulates quarterly and reconciles on one annual return. Here is the sequence.
Track FUTA on wages
As you pay wages, FUTA accrues on the first portion of each employee's pay, and it is deposited quarterly once it exceeds the threshold.
We apply the state credit
We calculate the year's FUTA and apply the correct state credit, checking whether your state is a credit-reduction state that changes the rate.
We e-file Form 940
We submit the annual return and capture the IRS acknowledgment as proof of timely filing.
We keep the date on the calendar
The annual deadline and any quarterly deposit points go on your calendar so the return is never late.
The credit is where accuracy pays off. Here is what we bring to it.
The right rate, and the credit applied correctly.
The most common FUTA error is applying the wrong rate, either missing the state credit or ignoring a credit reduction. The value here is a return that reflects your actual state situation, filed on time.
Credit applied, reductions checked
- We apply the state unemployment credit you have earned.
- We check whether your state is a credit-reduction state that year.
- We compute the liability on the correct wage base per employee.
One annual cycle, tracked
- The 940 sits with your quarterly 941s and year-end W-2s.
- The deadline lives on your compliance calendar.
- It draws from the same payroll as your other filings.
Flat annual fee shown up front. See what it costs →
FUTA is one of the year's payroll filings. Here is the road.
The annual FUTA return sits with the rest of payroll.
Form 940 is filed once a year alongside your quarterly 941s and year-end W-2s, all drawn from the same payroll. They live on one platform, so the payroll year stays consistent.
Run it, report FUTA once a year, and reconcile it all, all inside File.Business. One platform holds the payroll and every filing that flows from it.
The questions employers ask about Form 940.
What is FUTA, and who pays it?
FUTA is the Federal Unemployment Tax Act tax, which funds the federal share of the unemployment benefits system. It is paid entirely by the employer; unlike Social Security, Medicare, and income tax withholding, nothing is taken from the employee's paycheck. It is reported once a year on Form 940. This makes it different in both who pays it and how often it is filed from the quarterly Form 941 that handles withholding and FICA.
Why does the rate drop from 6.0 percent to 0.6 percent?
The headline FUTA rate is 6.0 percent on the first 7,000 dollars of each employee's wages, but employers who pay their state unemployment tax in full and on time receive a credit of up to 5.4 percent against the federal tax. That credit brings the effective federal rate down to as low as 0.6 percent for most employers. The credit is the reason the tax is much smaller in practice than the headline rate suggests, which is why applying it correctly matters.
What is a credit-reduction state?
When a state borrows from the federal unemployment fund to pay benefits and does not repay the loan within the allowed time, it becomes a credit-reduction state. Employers in that state receive a smaller FUTA credit, which raises their effective federal rate above the usual 0.6 percent. The list of credit-reduction states changes from year to year. We check your state's status when we prepare your 940, so your rate reflects the current designation rather than an assumption.
When is Form 940 due?
Form 940 is filed once a year and is due January 31 for the prior calendar year. If you deposited all of your FUTA tax on time during the year, you get a short extension to February 10 to file the return. Even though the return is annual, the tax may need to be deposited during the year in quarters where your accumulated liability crosses the deposit threshold, so the filing date and the deposit timing are handled together.
Do I have to deposit FUTA during the year?
Sometimes. FUTA is deposited quarterly in any quarter where your accumulated FUTA liability exceeds 500 dollars. If it stays at or below that amount, it carries forward to the next quarter, and any remaining balance is paid with the annual return. For many small employers the liability is small enough that little or no interim deposit is needed, but we track it so a required deposit is not missed, which would bring its own penalty.
Do I file Form 940 if I only pay contractors?
No. FUTA applies to wages paid to employees, not to payments to independent contractors, so if your workers are genuine contractors you do not file Form 940 for them; you report their pay on a 1099-NEC instead. The distinction hinges on proper worker classification, and misclassifying employees as contractors to avoid payroll and unemployment taxes is a problem the IRS and states pursue. We help confirm the classification so the right filings are made.