Form 940 is the annual federal unemployment tax return. Unlike most payroll taxes that are split between employer and employee, FUTA is paid entirely by the employer. Understanding how it works is essential for accurate annual tax compliance.
In This Guide
What Is FUTA Tax?
The Federal Unemployment Tax Act (FUTA) funds unemployment compensation programs at the federal level. Employers pay FUTA tax at 6.0% on the first $7,000 of each employee's annual wages — the FUTA wage base.
However, employers who pay state unemployment tax (SUTA) on time receive a credit of up to 5.4%, reducing the effective FUTA rate to just 0.6%. For most employers, the maximum FUTA tax per employee is $42 per year ($7,000 × 0.6%).
Who Must File Form 940?
You must file Form 940 if: (1) you paid wages of $1,500 or more in any quarter during the current or prior year, OR (2) you had one or more employees for at least some part of a day in any 20 or more different weeks in the current or prior year.
Most employers with even one employee will meet these thresholds. Exempt organizations (certain nonprofits and government entities) may be excluded.
Credit Reduction States
When a state borrows from the federal government to pay unemployment benefits and doesn't repay the loan within two years, it becomes a credit reduction state. Employers in these states receive a reduced FUTA credit, effectively increasing their FUTA tax rate.
The credit reduction amount varies by state and year. In recent years, states like California and New York have appeared on the credit reduction list. Check the Department of Labor's annual list before filing your 940.
Payrollix automatically checks the current year's credit reduction states and adjusts FUTA calculations accordingly — no manual lookup required.
Deposit Requirements
If your cumulative FUTA tax liability exceeds $500 in any quarter, you must deposit the tax by the last day of the following month. If your liability is $500 or less, carry it forward to the next quarter.
All FUTA deposits must be made through EFTPS. The annual Form 940 is due January 31 of the following year (or February 10 if all deposits were made on time).
Calculating FUTA Tax
For each employee, apply the 6.0% FUTA rate to wages up to $7,000. Once an employee's year-to-date wages exceed $7,000, stop accumulating FUTA for that employee. Then apply the state tax credit (up to 5.4%) and any credit reduction.
Example: 10 employees who each earn over $7,000/year → $7,000 × 10 = $70,000 taxable wages × 0.6% effective rate = $420 total FUTA tax for the year.
How Payrollix Handles Form 940
Payrollix tracks FUTA liability throughout the year during every payroll run. It knows exactly when each employee hits the $7,000 wage base and stops accumulating FUTA automatically.
At year-end, the system generates Form 940, applies credit reduction adjustments for affected states, and e-files directly to the IRS. Quarterly deposit reminders ensure you never miss a deposit deadline.
Automate your FUTA compliance
Payrollix calculates FUTA in real-time, reminds you of deposit deadlines, and e-files Form 940 automatically.
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