Employer's Annual Federal Unemployment (FUTA) Tax Return

Who Files Form 940

Employers who paid wages of $1,500 or more in any quarter of the current or prior year, or who had one or more employees for any part of a day in any 20 different weeks of the current or prior year. Most employers with even a single W-2 employee must file Form 940 annually.

What Form 940 Reports

FUTA is 6.0 percent of the first $7,000 of each employee's wages, with a credit of up to 5.4 percent for state unemployment tax (SUTA) timely paid, leaving a net 0.6 percent. State credit reduction states (occasionally including California, New York, and the US Virgin Islands when the state has outstanding federal unemployment loans) lose part of the credit, raising effective FUTA. Form 940 reports the calculation and any annual liability owed.

Key Deadlines

• January 31: annual filing and any net FUTA owed
• Quarterly deposits required if cumulative liability exceeds $500

Common Mistakes

• Missing FUTA on the first $7,000 of each employee's wages every year (the wage base does not carry forward)
• Failing to deposit FUTA quarterly when the threshold is exceeded
• Not accounting for state credit reduction states, leading to underpayment
• Forgetting Form 940 entirely for a small business with one or two W-2 employees

Best Practices

• Pay state unemployment (SUTA) timely so you qualify for the 5.4 percent FUTA credit, leaving net 0.6 percent. Late SUTA forfeits the credit.
• Watch credit-reduction states each year. The IRS publishes the list around November; affected states pay an additional 0.3 percent or more.
• Make quarterly deposits if cumulative FUTA liability exceeds $500. Annual lump-sum at filing is allowed only if total liability is $500 or less.
• For S-Corp owner-employees, include their reasonable comp in FUTA wages too (subject to the $7,000 wage base).
• Reconcile Form 940 wages to Form 941 wages and W-3 totals. Mismatches generate IRS / SSA correspondence.

Source: Official Form 940 information at IRS.gov