What Is FUTA Tax and Form 940?

Form 940 is used to report the annual FUTA (Federal Unemployment Tax Act) tax. FUTA is 6% on the first $7,000 of each employee's wages, is paid by employers only, and must not be deducted from employees' wages.

What FUTA tax pays for

According to the IRS, Form 940 is used to report the annual FUTA tax. Alongside state unemployment tax systems, FUTA funds unemployment compensation for displaced workers. While most employers must pay both federal and state unemployment taxes, only employers are responsible for paying FUTA tax — it should not be deducted from employees' wages.

FUTA tax rate and the credit

Employers may qualify for the maximum credit of 5.4%, reducing the effective FUTA rate to 0.6%, provided:

• All state unemployment taxes are paid on time.
• The state is not classified as a credit reduction state.

Once the $7,000 wage threshold is reached for an employee, no further FUTA tax is due for that individual.

Note: Some states are classified as credit-reduction states because they borrowed funds from the federal government to cover unemployment benefits. States that have not repaid these loans are ineligible for the full 5.4% credit, requiring employers to pay a higher FUTA tax rate.

FUTA tax deposits and filing requirements

Although Form 940 covers the entire calendar year, FUTA tax deposits may be required before filing the return.

• If FUTA tax liability exceeds $500 in a calendar year, at least one quarterly deposit must be made.
• If the liability is $500 or less in a quarter, it can be carried forward to the next quarter.
• Fourth-quarter liability must be paid with Form 940, regardless of the amount.

Employers should ensure compliance with FUTA tax regulations by making timely deposits and accurately filing Form 940 to avoid penalties.

How to amend Form 940

There is no separate "X" form for amendments. To correct a previously filed Form 940, check the Amended Return box in the top right corner of the form.

Additional resources

• IRS Topic no. 759, Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return — filing and deposit requirements
• IRS: About Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
• IRS: Correcting Employment Taxes

Frequently asked questions

Do employees pay any part of FUTA tax?

No. Only employers are responsible for paying FUTA tax, and it should not be deducted from employees' wages. Most employers must pay both federal and state unemployment taxes.

How much FUTA tax do I pay per employee?

The FUTA tax rate is 6% on the first $7,000 of each employee's wages. Once that $7,000 wage threshold is reached for an employee, no further FUTA tax is due for that individual.

Why is my FUTA rate higher than 0.6%?

The 0.6% effective rate applies only when an employer qualifies for the maximum 5.4% credit, which requires paying all state unemployment taxes on time and operating in a state that is not classified as a credit reduction state. States that borrowed federal funds to cover unemployment benefits and have not repaid them are ineligible for the full credit, so employers there pay a higher FUTA rate.

When do I have to make a FUTA deposit instead of just paying with Form 940?

If FUTA tax liability exceeds $500 in a calendar year, at least one quarterly deposit must be made. A liability of $500 or less in a quarter can be carried forward to the next quarter, and fourth-quarter liability must be paid with Form 940 regardless of the amount.

How do I correct a Form 940 I already filed?

There is no separate "X" form for Form 940 amendments. To correct a previously filed Form 940, check the Amended Return box in the top right corner of the form.