IRS Form — Unemployment Tax

Form 940 — Employer's Annual Federal Unemployment Tax Return (FUTA)

Form 940 reports and pays the Federal Unemployment Tax Act (FUTA) tax — an employer-only tax that funds the federal unemployment insurance system. The effective FUTA rate is 0.6% on the first $7,000 of each employee's wages after the state unemployment tax credit — but credit reduction states can increase this significantly. Filed annually, but deposits may be required quarterly.

0.6%Effective FUTA Rate (after credit)

$7,000FUTA Wage Base Per Employee

$42/employeeMaximum Annual FUTA Tax (standard)

IRC §3301Statutory Authority

Verified 2026 IRS Figures IRC §3301–§3311 IRS Pub. 15 (Circular E)

Gross FUTA Rate6.0%

State Credit (normal)5.4%

Net FUTA Rate (normal)0.6%

FUTA Wage Base$7,000/employee

Annual Filing DeadlineJanuary 31

Deposit Threshold$500/quarter

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FUTA Rate Calculation — The State Credit Mechanism

The gross FUTA rate is 6.0% on the first $7,000 of each employee's wages. However, employers who pay their state unemployment taxes (SUTA) on time receive a credit of up to 5.4% against the FUTA rate — reducing the effective rate to 0.6%. This means the maximum annual FUTA tax per employee is $42 ($7,000 × 0.6%).

The credit reduction mechanism is where FUTA planning becomes important. States that have borrowed from the federal unemployment trust fund and have not repaid the loans are "credit reduction states." Employers in these states receive a reduced state credit — increasing their effective FUTA rate above 0.6%. The IRS publishes the list of credit reduction states each November for the prior tax year. For 2025 tax year, the IRS announced credit reduction states in November 2025.

Scenario	FUTA Rate	Tax per Employee (on $7,000)
Normal state (full 5.4% credit)	0.6%	$42
Credit reduction state — 0.3% reduction	0.9%	$63
Credit reduction state — 0.6% reduction	1.2%	$84
Credit reduction state — 0.9% reduction	1.5%	$105
No state credit (e.g., exempt from SUTA)	6.0%	$420

Who Is Exempt from FUTA

Several categories of workers and employers are exempt from FUTA:

Exemption	Details
Sole proprietor hiring their child under age 21	Wages paid by a sole proprietor to their child under 21 are exempt from FUTA under §3306(c)(5)
Spouse employed by sole proprietor	Wages paid to a spouse are exempt from FUTA under §3306(c)(6)
Parent employed by child	Wages paid to a parent by a child are exempt from FUTA under §3306(c)(7)
Independent contractors	Payments to independent contractors (1099 workers) are not subject to FUTA — only employees are covered
Certain nonprofit organizations	Organizations exempt under §501(c)(3) are not subject to FUTA — they participate in the state unemployment system directly
Agricultural workers (limited)	Special rules apply under §3306(k) for agricultural labor

Deposit Requirements

Unlike Form 941 which has monthly or semi-weekly deposit schedules, FUTA deposits are required only when the cumulative FUTA tax liability exceeds $500 in a quarter. If the liability is $500 or less at the end of a quarter, it carries over to the next quarter. The deposit deadlines are:

Quarter	Deposit Due Date (if liability exceeds $500)
Q1 (Jan–Mar)	April 30
Q2 (Apr–Jun)	July 31
Q3 (Jul–Sep)	October 31
Q4 (Oct–Dec)	January 31 (or pay with Form 940)

For most small employers with fewer than 20 employees, the annual FUTA liability rarely exceeds $500 per quarter — so deposits are typically not required during the year, and the full amount is paid with the annual Form 940 by January 31.

Frequently Asked Questions

Does an S-Corp owner-employee pay FUTA on their own wages?

Yes — FUTA applies to wages paid to S-Corp shareholder-employees just like any other employee. The S-Corp pays FUTA on the first $7,000 of the shareholder-employee's wages. Since S-Corp owners typically pay themselves reasonable compensation that exceeds $7,000 early in the year, the FUTA liability is usually capped at $42 per owner-employee per year (assuming the state is not a credit reduction state). This is one reason why the S-Corp structure is tax-efficient — the FUTA exposure is minimal compared to a sole proprietorship where all net profit is subject to SE tax.

What happens if an employer is late paying FUTA?

Late FUTA deposits are subject to the same failure-to-deposit penalties as Form 941: 2% for 1–5 days late, 5% for 6–15 days late, 10% for more than 15 days late. The failure-to-file penalty for Form 940 is 5% per month up to 25% of unpaid tax. The failure-to-pay penalty is 0.5% per month. Because FUTA amounts are relatively small for most employers, the penalties are also small — but they can be avoided entirely by setting up EFTPS deposits and filing on time.

How does a multi-state employer handle FUTA?

Multi-state employers file a single Form 940 but must complete Schedule A (Multi-State Employer and Credit Reduction Information) to allocate wages by state and calculate the correct credit for each state's unemployment tax payments. If any of the states where the employer pays wages are credit reduction states, Schedule A calculates the additional FUTA tax owed. The employer pays SUTA in each state where employees work and claims the corresponding credit on Form 940. Proper allocation of wages to the correct state is critical — misallocation can result in underpayment of SUTA in one state and overclaiming of FUTA credit.

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More Tax Planning FAQs

What is the S-Corp election and how does it reduce self-employment tax?

An S-Corp election allows the owner to split income between a reasonable salary (subject to 15.3% FICA) and distributions (not subject to FICA). For a business owner with $200,000 in net profit paying an $80,000 salary, the annual SE tax savings are approximately $15,500–$18,500. The S-Corp must file Form 2553 within 75 days of formation.

What is the Section 199A QBI deduction and how does it apply?

The §199A deduction allows pass-through business owners to deduct up to 23% of qualified business income (QBI) from taxable income under OBBBA. For taxpayers above $403,500 (MFJ) in 2026, the deduction is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of qualified property.

What retirement plan options are available for self-employed professionals?

Self-employed professionals can establish a Solo 401(k) (up to $70,000 in 2026), a SEP-IRA (25% of net self-employment income up to $70,000), a SIMPLE IRA ($16,500 + $3,500 catch-up), or a Defined Benefit Plan (up to $280,000+ depending on age). The Solo 401(k) is the best option for most self-employed professionals.

How does the home office deduction work for self-employed professionals?

Self-employed professionals who use a dedicated home office space exclusively and regularly for business qualify for the home office deduction under §280A. The deduction is calculated as a percentage of home expenses equal to the office square footage divided by total home square footage. The simplified method allows $5/sq ft up to 300 sq ft ($1,500 maximum).

What vehicle deductions are available for self-employed professionals?

Self-employed professionals can deduct vehicle expenses using either the standard mileage rate (70 cents/mile in 2026) or actual expenses. Vehicles with a GVWR over 6,000 lbs qualify for §179 expensing and bonus depreciation without luxury auto limits. A mileage log must be maintained for either method.

What is the Augusta Rule and how can it benefit business owners?

The Augusta Rule (§280A(g)) allows homeowners to rent their primary or secondary residence to their business for up to 14 days per year. The rental income is completely tax-free to the homeowner, and the business deducts the rent as a business expense. At $2,000–$3,000/day for 14 days, this strategy generates $28,000–$42,000 of tax-free income.

How does cost segregation apply to business owners who own real estate?

Cost segregation reclassifies building components into shorter depreciation categories eligible for bonus depreciation. For a $1M commercial property, cost segregation typically identifies $150,000–$250,000 of accelerated depreciation, generating $60,000–$100,000 in first-year deductions at the 40% bonus depreciation rate in 2026.

What is the self-employed health insurance deduction?

Self-employed professionals can deduct 100% of health insurance premiums (for themselves, their spouse, and dependents) as an above-the-line deduction under §162(l). This deduction reduces AGI and is available even if the taxpayer does not itemize. S-Corp owners must include premiums in W-2 wages before claiming the deduction.

How should a self-employed professional handle estimated tax payments?

Self-employed professionals must make quarterly estimated tax payments by April 15, June 15, September 15, and January 15. The safe harbor is 100% of prior year tax (110% if prior year AGI exceeded $150,000). Failure to pay sufficient estimated taxes results in an underpayment penalty under §6654.

What is the excess business loss limitation for pass-through owners?

Under §461(l), pass-through business owners cannot deduct business losses exceeding $305,000 (single) or $610,000 (MFJ) in 2026 against non-business income. Excess losses are treated as an NOL carryforward to the following year.

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