Form 940: The Employer's Annual FUTA Tax Return

Who Must File Form 940?

You must file Form 940 if you paid wages of $1,500 or more in any calendar quarter during the year, or if you had at least one employee for any part of 20 or more weeks during the year, whether or not those weeks were consecutive. Agricultural employers and household employers operate under different thresholds and should verify their specific obligations with IRS guidance for those categories.

How Is FUTA Tax Calculated?

The FUTA tax rate is 6% on the first $7,000 of each employee's wages for the year. Most employers qualify for a 5.4% credit against that rate because they also pay state unemployment taxes (SUTA), which brings the effective FUTA rate down to 0.6%. At that reduced rate, the maximum FUTA liability per employee is $42 per year.

The credit assumes you paid your state unemployment taxes in full and on time. Late SUTA payments can reduce or eliminate the federal credit, raising your effective FUTA liability.

The FUTA Credit Reduction Trap

When a state borrows from the federal unemployment fund to cover benefit shortfalls and hasn't repaid the loan, the IRS reduces the FUTA credit available to employers in that state. Instead of paying the standard 0.6% effective rate, employers in credit reduction states pay a higher rate, and the difference can add up meaningfully across a full payroll.

The IRS publishes the list of credit reduction states each November, after most employers have already run nearly a full year of payroll at the assumed 0.6% rate. Businesses in affected states then face a higher-than-expected year-end bill with very little runway to plan for it. Checking the credit reduction list before the end of Q3 gives you enough time to set aside the difference before the January 31 filing deadline.

Form 940 Filing Deadline and Deposit Schedule

Form 940 is due January 31 of the following year. However, if your FUTA tax liability exceeds $500 in any calendar quarter, you're required to deposit that amount by the last day of the month following the quarter. If your liability stays under $500, it carries forward to the next quarter and can be paid with the annual return.

In practice this means many small employers with modest payrolls never trigger a mid-year deposit and simply pay with the annual filing. Employers with larger payrolls will hit the $500 threshold in Q1 and deposit quarterly throughout the year.

Form 940 vs. Form 941: Key Difference

Form 941 is filed quarterly and covers the payroll taxes withheld from employee wages, including federal income tax, Social Security, and Medicare, along with the employer's matching share of Social Security and Medicare. Form 940 is filed annually and covers only FUTA, the unemployment tax paid solely by the employer. They run on separate schedules, cover separate tax obligations, and are easy to conflate because both deal with employment taxes. The simplest way to keep them straight: 941 is quarterly and involves employee withholding, 940 is annual and is entirely on the employer.

How Slash Helps Employers Stay Ahead of FUTA Obligations

FUTA liability is easy to underestimate because it accrues quietly across the year and is reconciled only at filing. Employers who aren't tracking it quarterly sometimes reach January with a tax bill larger than expected, particularly if they're in a credit reduction state or had strong hiring activity.

A Slash business bank account gives you real-time visibility into cash flow throughout the year, making it straightforward to set aside FUTA deposits each quarter rather than absorbing the full liability at once. When you know what's in your account and can see income and expenses as they happen, year-end tax obligations stop being surprises.