Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return. Once a year it reports the wages you paid that are subject to federal unemployment tax and squares the tax owed with what you deposited. The 2026 return is due February 1, 2027, or February 10, 2027 if every FUTA deposit was made on time.
The form is short, and for most small employers the bill is too. After the usual state credit, FUTA tops out at $42 per employee for the whole year. The work is in getting lines 3 to 7 right, which is where this guide spends most of its time.
Who has to file Form 940
You file if either test below was met in 2026 or the year before. It does not matter whether the people worked full time, part time or for a few weeks in summer.
- Wage test: your payroll reached $1,500 in a single quarter.
- Weeks test: someone was on your payroll, even for part of a day, during 20 separate weeks. Count part-timers and temporary staff, but not partners in a partnership.
Farm employers have their own test: $20,000 in cash wages to farmworkers in a quarter, or 10 or more farmworkers in 20 different weeks.
Some employers never file it. A family that employs only a nanny or housekeeper owes FUTA once cash wages reach $1,000 in a quarter, but pays it through Schedule H, attached to the family’s personal tax return. Most 501(c)(3) charities and state and local governments are outside FUTA altogether, so no Form 940 is required.
Contractors you pay on a 1099 are not employees, so their pay never appears on the form. If you are unsure which side a worker falls on, see W-2 vs 1099.
Before you start: the numbers you need
Form 940 is built from your payroll records for the calendar year. Gather these first:
- Total pay to each employee for the year, split by quarter.
- Any pay that is exempt from FUTA, such as employer-paid health insurance, retirement plan contributions or dependent care up to $7,500.
- The state or states where you had to pay state unemployment tax, and whether you paid it all on time.
- Every FUTA deposit you made during the year, with dates.
Two changes affect what counts as exempt for 2026. The dependent care limit went up, and moving expense and bicycle commuting reimbursements are now taxable for FUTA, so they no longer belong on line 4.
A Form 940 filled in, line by line
Here is a complete return for an invented landscaping company in Boise, Idaho. It has a full-time crew lead with employer-paid health insurance, a part-time office manager, two mowers who work April to October and a helper for the spring cleanup.
| Employee | Paid (line 3) | Exempt (line 4) | Over $7,000 (line 5) | FUTA wages |
|---|---|---|---|---|
| Crew lead, full time | $48,000 | $3,600 | $37,400 | $7,000 |
| Office manager, part time | $16,800 | $9,800 | $7,000 | |
| Mower, April to October | $15,000 | $8,000 | $7,000 | |
| Mower, April to October | $11,700 | $4,700 | $7,000 | |
| Spring cleanup helper | $3,900 | $3,900 | ||
| Total | $95,400 | $3,600 | $59,900 | $31,900 (line 7) |
Each row shows the same idea. A person’s pay counts toward FUTA only until it reaches $7,000, and health insurance the company pays for never counts. The crew lead earns more than three times what either mower does, yet each of them adds the same capped amount to line 7.
Those totals feed the form itself. Here is every line the company fills in, in the order the form asks for them:
| Line | What it asks | This company |
|---|---|---|
| 1a | State where you paid state unemployment tax | ID |
| 1b, 2 | More than one state, or a credit reduction state | Blank: one state, not a credit reduction state |
| 3 | Total payments to all employees | $95,400 |
| 4 | Payments exempt from FUTA tax | $3,600 (box 4a, fringe benefits: health insurance) |
| 5 | Total of payments made to each employee in excess of $7,000 | $59,900 |
| 6 | Subtotal (line 4 + line 5) | $63,500 |
| 7 | Total taxable FUTA wages (line 3 - line 6) | $31,900 |
| 8 | FUTA tax before adjustments (line 7 x 0.006) | $191.40 |
| 9 to 11 | Adjustments: no state tax, state tax paid late, credit reduction | Blank |
| 12 | Total FUTA tax after adjustments | $191.40 |
| 13 | FUTA tax deposited for the year | $0.00 |
| 14 | Balance due | $191.40, paid with the return |
| 16, 17 | Liability by quarter, and for the year | Blank: line 12 is $500 or less |
Part 1 names the state on line 1a. A business that paid state unemployment tax in more than one state checks line 1b instead and attaches Schedule A. You fill in line 1a or 1b even when your state rate was zero.
Part 2 works down from all pay to taxable pay. Line 3 is every payment to employees, line 4 takes out the exempt part, and line 5 takes out what each person earned above $7,000. What is left on line 7 is multiplied by 0.6% on line 8.
Part 4 compares the tax with your deposits. This company owed so little that it never had to deposit during the year, so the whole amount is paid with the return. Line 13 is zero and line 14 is the full tax.
An employer whose line 12 is more than $500 also fills in Part 5: the tax that arose in each quarter on lines 16a to 16d, and the year’s total on line 17. These are liabilities, not deposits, so enter the tax from each quarter’s wages even if you paid it later.
Part 3: when the full state credit does not apply
Line 8 builds in the largest possible credit, 5.4%, for the state tax you paid. Part 3 is where the tax goes up when you do not. If every state unemployment payment was made by the Form 940 deadline, covered the same wages, and no credit reduction applies where you operate, skip all three lines.
| Situation | Where it goes | FUTA tax, line 12 |
|---|---|---|
| State unemployment tax paid in full and on time | Line 8 only | $191.40 |
| All FUTA wages excluded from state unemployment tax | Line 9: line 7 x 0.054 | $1,914.00 |
| Same wages paid in California (potential credit reduction 5.3%, estimate) | Line 11 from Schedule A | $1,882.10 |
| Same wages paid in U.S. Virgin Islands (potential credit reduction 4.8%) | Line 11 from Schedule A | $1,722.60 |
Line 9 applies when state law excluded every FUTA wage you paid, for example when the only employees were corporate officers your state does not cover. With no state tax paid there is no credit, so the full 6% applies. A state rate of zero is different: that still counts as paying state tax.
Line 10 is for some wages excluded, or state tax that reached the state too late. A worksheet in the instructions figures the credit you lose; late state tax still earns 90% of its credit. Keep the worksheet with your records rather than attaching it.
Line 11 carries the extra tax for wages in a credit reduction state, a state that still owes the federal government for loans used to pay benefits. It comes from Schedule A. The U.S. Department of Labor confirms the list after November 10, 2026; our FUTA guide keeps the current list.
Deposits, payment and filing
You owe FUTA as wages are paid, but you only send it in once enough builds up. Check the running total as each quarter closes: above $500, a deposit is due within a month; at or below it, the amount rolls into the next quarter. All deposits are electronic.
A balance on line 14 of $500 or less can be paid with the return. The IRS asks for an electronic payment where you can make one. Only an employer without access to U.S. banking pays by check, made out to the United States Treasury with Form 940-V.
The IRS encourages filing electronically, through payroll software or a tax professional. Paper returns go to an IRS address that depends on your state and on whether a payment is enclosed, listed in the instructions.
Form 940, the quarterly Form 941 filings and your W-2s all draw on the same payroll. Keeping a payroll register with a column for FUTA wages makes line 7 a matter of adding up, not reconstructing.
Form 940 and Form 941 side by side
People confuse them because the numbers are one apart and both come out of payroll. They report different taxes on different schedules:
| Form 940 | Form 941 | |
|---|---|---|
| Tax | Federal unemployment (FUTA) | Withheld income tax, Social Security and Medicare |
| Who pays it | Employer only | Employee and employer |
| How often | Once a year | Every quarter |
| Wages counted | First $7,000 per employee | All wages, up to the Social Security wage base for that tax |
Most employers file both. Form 941 walks through the quarterly return the same way this guide does the annual one.
Amending, closing and penalties
To fix a filed return, take a Form 940 for the same year, check box a, enter every amount as it should have been and explain why. You can e-file the amended return. When the business shuts down or the last paycheck goes out for good, check box d on that final return.
Filing late is charged at 5% of any unpaid balance per month the return is overdue, capped at 25%; paying late adds 0.5% monthly, with interest on top. Under a new IRS program, filers with three years of on-time filing and payment are excused from these penalties automatically.
Sources: IRS 2026 Instructions for Form 940 (early release draft) and About Form 940; Publication 15 (2026), section 14; U.S. Department of Labor credit reduction list. Checked October 24, 2026.
