Form 940 is the employer's annual accounting of federal unemployment tax. FUTA (the Federal Unemployment Tax Act) funds the administrative costs of state unemployment insurance programs and supports the federal portion of unemployment benefits. Unlike FICA , FUTA is employer-only; employees don't pay into it and don't see it on their pay stubs. The mechanics are straightforward on paper: 6.0% federal rate on the first $7,000 of each employee's wages, minus a 5.4% credit for timely state unemployment tax payments, leaving 0.6% in most states. The details matter at the margins, especially for multi-state employers and credit reduction states.
What Form 940 Reports The form captures total FUTA-taxable wages for the year, any adjustments, the FUTA tax liability, deposits made during the year, and any remaining tax owed or overpayment. Wages subject to FUTA include salaries, wages, tips, commissions, bonuses, vacation pay, sick pay (with some limits), and most fringe benefits. FUTA applies to the first $7,000 of wages per employee per year; wages above $7,000 are not subject to FUTA.
Employers who paid $1,500 or more in wages in any calendar quarter or employed one or more workers for at least some part of a day in 20 or more different weeks must file Form 940. Household and agricultural employers have separate thresholds that apply.
The 5.4% State Credit and Credit Reduction States The federal 6.0% rate is effectively reduced to 0.6% for employers who pay state unemployment tax on time and whose state is not a credit reduction state. Credit reduction states are those that have outstanding federal loans to cover state unemployment benefits; the federal government reduces the state credit each year the loan remains unpaid, increasing the effective FUTA rate for employers in those states.
For 2026, employers should check the IRS credit reduction state list each January when preparing Form 940. Credit reduction historically has applied to states like California, Virgin Islands, and others during post-recession periods. The reduction is announced in November of the tax year and affects the effective FUTA rate for that year.
When Are FUTA Deposits Due? FUTA deposits are quarterly when the cumulative liability exceeds $500. If the liability is below $500, the employer can carry it to the next quarter. Small employers often end up paying the full year with the Form 940 filing in January. Deposits are made through EFTPS , same as FICA and FIT.
How Form 940 Interacts With State Unemployment FUTA is the federal piece; state unemployment insurance (SUI) is a separate obligation that varies by state. The 5.4% FUTA credit is tied to paying SUI on time, so SUI compliance directly affects the federal tax. Employers filing in multiple states must track state unemployment rates, wage bases (which vary significantly, from $7,000 in several states to over $60,000 in Washington), and filing deadlines for each state.
Integration with the payroll provider usually handles both federal FUTA and state SUI filings automatically. In-house teams need to track the state requirements separately and make sure SUI payments are current before claiming the 5.4% federal credit.
Running a Clean FUTA Compliance Year Four practical checkpoints keep Form 940 filings clean. Track FUTA-taxable wages per employee and stop accruing FUTA liability at the $7,000 wage base. Reconcile FUTA liability quarterly and deposit through EFTPS when cumulative liability exceeds $500. Confirm state unemployment insurance is current before claiming the 5.4% credit. And file Form 940 by January 31 (or February 10 if all deposits were made on time during the year).
The IRS publishes Form 940, instructions, the credit reduction state list, and FUTA deposit rules at irs.gov/forms-pubs/about-form-940 . For related employer tax obligations, see Form 941 , FICA , and payroll .
.svg)
.svg)
