Form 940 and Federal Unemployment Tax (FUTA)

Federal unemployment tax, known as FUTA, is paid only by employers. It helps fund state unemployment offices and a federal loan fund that states can borrow from when benefit claims run high. You report it once a year on Form 940, and you may have to deposit it during the year before you file.

Who owes FUTA

You generally file Form 940 if you paid wages of $1,500 or more in any calendar quarter of the current or prior year, or if you had at least one employee on some part of a day in 20 or more different weeks in either year. Household employers have a lower test of $1,000 in any quarter and report FUTA on Schedule H instead. See household employer rules.

Some pay is exempt from FUTA, including certain employer contributions to accident and health plans, group-term life insurance, employer contributions to qualified retirement plans, dependent care benefits up to the exclusion amount, workers' compensation payments, and pay to your spouse, your child under 21, or your parent. Corporate officers are employees, so FUTA applies to an S corporation owner's wages. See payroll for S corporation owners.

How the tax is calculated

FUTA applies to the first $7,000 of wages paid to each employee in the calendar year, after subtracting exempt pay. This federal wage base is separate from your state wage base, which can be higher.

The full credit of up to 5.4% requires three things: you paid your state unemployment tax in full, you paid it by the Form 940 due date, and your state is not a credit reduction state. The DOL's own tax topic page puts the maximum bill in a state with no reduction at $42 per employee per year ($7,000 x 0.6%).

Example. A business paid 12 employees more than $7,000 each in 2026. FUTA wages are 12 x $7,000 = $84,000. The tax at 0.6% is $504. Because that is more than $500, the deposit rules below apply.

Credit reduction states

When a state borrows from the federal government to pay jobless benefits and has not repaid the loan after two or more consecutive January 1 dates, its employers lose part of the credit unless the loan is repaid by November 10 of the year. The reduction raises the effective FUTA rate for wages paid to employees in that state, and affected employers complete Schedule A (Form 940).

For 2025, the DOL's final list applied a credit reduction in California (1.2%) and the U.S. Virgin Islands (4.5%). For 2026, the DOL's published potential list again names California and the Virgin Islands. The final list for 2026 is not set until November 10, 2026, so check the DOL page and the 2026 Schedule A instructions when you prepare the return.

Example. If an employee in a state with a 1.2% reduction earns more than $7,000, the extra FUTA is $7,000 x 1.2% = $84 for that employee, on top of the usual $42.

Deposits during the year

If your FUTA liability for a quarter is $500 or less, you carry it over to the next quarter. Once your accumulated liability is over $500, deposit it by the last day of the month after the quarter ends: April 30, July 31, October 31 and January 31, shifted to the next business day when a date falls on a weekend or holiday. If you owe $500 or less after the fourth quarter, you can pay it with Form 940. Use the same electronic methods as other federal deposits. See federal payroll tax deposits.

Filing Form 940

Form 940 is due January 31 after the year ends, with the usual shift to the next business day. The 10 extra days apply only if all your FUTA deposits were made on time. Refunds can be paid by direct deposit and balance-due payments should be made electronically. There is no separate correction form: to fix an error, file a new Form 940 with the amended-return box checked. Our deadlines calendar lists the dates through 2027.

Common mistakes

• Paying state unemployment tax late, which can reduce the FUTA credit.
• Forgetting Schedule A for wages paid in more than one state or in a credit reduction state.
• Assuming a payroll provider's FUTA calculation is right without checking the wage base.
• Treating FUTA as the same thing as state unemployment insurance. They are two taxes. See state unemployment insurance.

How we can help

We prepare Form 940 and Schedule A, check that state unemployment tax was paid in a way that supports the full credit, and schedule quarterly FUTA deposits. Read about our payroll services, or review how FUTA fits with the rest of payroll tax basics.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.