This hub answers 22 of the most frequently asked questions about FUTA tax liability and Form 940 filing requirements. If you want the fuller narrative on why liability isn't universal, Asure's breakdown of why not every employer owes FUTA covers the three-test decision process behind these answers. This hub covers the specific answers themselves, organized into six categories: fundamentals, thresholds, entity types, exemptions, contractors and mixed workforces, and penalties.
FUTA and Form 940 Fundamentals
What is Form 940 and what does it report?
Form 940 is the IRS annual return employers use to report and reconcile their Federal Unemployment Tax Act, FUTA, liability for a calendar year. It covers only the federal unemployment tax, separate from FICA and income tax withholding, and it is generally due January 31 of the following year, per the IRS's Form 940 instructions. Form 940 reconciles a full year's FUTA liability in a single annual filing, even though FUTA deposits themselves may be required quarterly if cumulative liability crosses $500 during the year; an employer whose FUTA liability stays under that $500 mark all year simply pays the full amount when the annual return is filed, with no quarterly deposit required at all. The form also carries a checkbox for confirming whether the employer paid state unemployment tax in every state where it had employees, which is what the IRS uses to verify eligibility for the 5.4% credit described in later questions on this page.
Do we need to file Form 940, and how is FUTA different from other payroll taxes?
You need to file Form 940 if you meet one of the IRS's liability tests, most commonly paying $1,500 or more in wages in any calendar quarter or employing someone for 20 or more weeks in the year. FUTA differs structurally from FICA in a way that trips up a lot of first-time filers: FUTA is a flat 6.0% rate on the first $7,000 of each employee's annual wages, paid entirely by the employer, while FICA splits into a 6.2% Social Security and 1.45% Medicare rate, both matched between employee and employer. FUTA is never withheld from an employee's paycheck the way FICA and income tax withholding are.
Who is responsible for paying the FUTA tax?
The employer alone. FUTA is never deducted from an employee's wages; the full 6.0% rate, before any state credit, is an employer-only cost that sits on top of the wages themselves, similar to the way the FICA employer match sits on top of wages as its own separate employer cost. An employee's paystub should never show a FUTA line item, since there's nothing for the employee to see: the entire obligation runs through the employer's own Form 940 filing and tax deposits, with no employee-facing component at all. This is worth confirming explicitly with a new payroll system or a new bookkeeper, since a FUTA line item appearing anywhere on an employee's own pay stub is itself a sign something in the payroll configuration is set up incorrectly.
Do I need to file both Form 940 and Form 941?
Yes, if you have FUTA liability and also withhold income tax and FICA, which covers the vast majority of ordinary employers. Form 941 reports federal income tax withholding and FICA on a quarterly basis, due April 30, July 31, October 31, and January 31, per the IRS's Form 941 instructions, while Form 940 reports FUTA liability once a year. The two forms cover entirely different taxes on entirely different schedules, so filing one doesn't satisfy the requirement to file the other; an employer liable for both taxes has both filing obligations running in parallel throughout the year.
Wage and Headcount Thresholds
What are the wage and headcount thresholds that trigger Form 940 filing?
Most employers become liable under the IRS's general test: paying $1,500 or more in wages in any single calendar quarter, or employing at least one worker for part of a day in each of 20 or more different weeks during the year, whether or not those weeks are consecutive. Meeting either prong of that test on its own is enough to trigger liability for the full year, per the IRS's Form 940 instructions; an employer doesn't need to meet both the wage threshold and the headcount threshold, just one of the two.
Does FUTA apply to all employers, or are some businesses exempt?
No, FUTA liability depends on a two-part determination: first, whether the employer meets one of the IRS's liability tests, the general test, the household test, or the agricultural test, and second, whether the employer falls under a statutory exemption such as a 501(c)(3) nonprofit or a government entity. An employer can meet the wage or headcount threshold and still owe nothing if a statutory exemption applies, which is why entity type has to be checked alongside the wage and headcount numbers, as an independent second test. A for-profit business with a modest handful of part-time employees and a tax-exempt nonprofit with dozens of full-time staff can land on opposite sides of the liability question even when the nonprofit's raw wage and headcount numbers look far larger, purely because of which side of the exemption line each organization falls on.
How does headcount change mid-year affect FUTA liability?
FUTA liability is assessed on a calendar-year basis, so a headcount change partway through the year can trigger liability retroactively across the full year, back to January, once a threshold is crossed. An employer that hires its first employee in the third quarter and pays that employee $1,500 or more in that quarter becomes liable for FUTA on all wages paid to any employee earlier in that same calendar year too, even the months before that employee was hired. That retroactive scope is one of the more commonly missed details in FUTA liability, since it's easy to assume liability starts on the date a threshold is actually crossed instead of running back across the entire calendar year once it is. A company planning a headcount ramp partway through the year benefits from checking this in advance: crossing the threshold in Q3 doesn't just add FUTA cost for Q3 and Q4, it retroactively adds FUTA liability, and a Form 940 filing obligation, for wages already paid earlier in the same year. AsureCentral and AsureWorks both track headcount and cumulative wages against this threshold as each new hire is added, so a company scaling quickly gets a flag the moment a quarter crosses $1,500 or a 20-week headcount test is met, rather than discovering the retroactive liability when the annual return is prepared months later.
What is the FUTA tax rate and wage base?
The FUTA tax rate is 6.0% on the first $7,000 of each employee's annual wages, per the IRS Tax Topic 759 wage-base reference. Employers who pay their state unemployment taxes on time and in full typically qualify for a 5.4% credit, reducing the effective FUTA rate to 0.6%, which works out to a maximum of $42 per employee per year for most employers. That $7,000 wage base has not changed since 1983, so the maximum per-employee cost has stayed essentially flat for decades even as actual wages have grown substantially over the same period.
Entity Types and Special Cases
Does an S-corp have to file Form 940?
Yes, if the S-corp pays reasonable compensation as W-2 wages to a shareholder-employee and meets one of the FUTA liability tests, the same as any other employer. The IRS requires an S-corp to pay its working owners reasonable compensation through payroll, per IRS guidance on S-corporation compensation, separate from any additional profit the owner takes as a distribution, and those W-2 wages are subject to FUTA the same way any other employee's wages are, once the general test's threshold is met. An S-corp owner who tries to minimize employment taxes by taking an unreasonably low salary and a large distribution instead is a well-documented IRS audit target, since reasonable compensation is evaluated strictly against what a similarly-situated employee would be paid for the same work, independent of whatever figure would minimize the owner's own payroll tax bill.
Does a single-member LLC pay FUTA?
Yes, if it has W-2 employees who meet a liability test. A single-member LLC's pass-through tax status for income tax purposes has no bearing on its employment tax obligations; FUTA, FICA, and income tax withholding all apply to a single-member LLC's employees the same way they would apply to a corporation's employees, since employment tax liability is determined by the employer-employee relationship, regardless of the owner's chosen entity structure or how the business is taxed at the owner level. This is a common misconception specifically because a single-member LLC's owner-level tax treatment gets so much attention in general small-business tax guidance; that pass-through framing describes how the owner's own profit is taxed, and has no bearing on how the LLC's employees' wages are taxed once the business has W-2 payroll at all.
Does FUTA apply to agricultural or household employers?
Yes, but under different thresholds than the general test. The agricultural test applies to farm employers and looks at either $20,000 or more in cash wages to farmworkers in any calendar quarter, or 10 or more farmworkers employed for part of a day in each of 20 or more different weeks. The household test applies to employers of household workers, nannies, in-home caregivers, and similar domestic employees, and uses a $1,000-or-more-per-quarter cash wage threshold instead, reported on Schedule H, a form attached to the employer's own personal Form 1040 return, per the IRS's Schedule H instructions, instead of the standalone Form 940 that most other liable employers file. A family that meets the household test's $1,000-per-quarter threshold owes FUTA even though they never think of themselves as running a business with employees, which is exactly why the household test catches people off guard more often than the general or agricultural tests do.
Do I have to file Form 940 if I had no employees this year but did last year?
Often yes, at least for one additional year. An employer who was FUTA-liable in a prior year but has no employees or FUTA liability in the current year still generally needs to file Form 940 for that year, checking the box on the form indicating no wages were paid, instead of simply stopping the filing without notifying the IRS. Skipping the filing without checking that box can generate an IRS notice asking why an expected return wasn't received, since the IRS's own records still show the employer as an active FUTA filer from the prior year. Formally closing out FUTA filing obligations, once a business has genuinely stopped having employees for good, and not just for a single slow year, involves a separate step beyond checking that one box, and confirming the correct closing procedure with a tax professional avoids a recurring, unnecessary annual filing for a business that no longer has any employment tax activity at all.
Exemptions
Who is exempt from filing Form 940?
Several categories are statutorily exempt from FUTA regardless of wages paid or headcount: organizations described in Internal Revenue Code Section 501(c)(3), government employers at the federal, state, and local level, Indian tribal governments, and wages paid to an employer's spouse, parent, or child under age 21 in certain family-employment arrangements. These exemptions remove FUTA liability entirely; they aren't a reduced rate or a credit, they're a full statutory carve-out from the tax. That distinction matters because an exempt employer sometimes still has separate state-level unemployment obligations even where FUTA itself doesn't apply, so confirming the federal exemption is only half of the compliance picture; the state side needs its own independent check against that state's own unemployment insurance rules.
Can a nonprofit organization be exempt from FUTA?
Yes, but only if it holds a genuine Section 501(c)(3) exemption; not every category of nonprofit qualifies. A 501(c)(3) charitable or religious organization is generally exempt from FUTA, while a 501(c)(6) trade association or business league, a different exemption category under the same broader tax code section, is not automatically exempt from FUTA the same way. Confirming the organization's exact IRS exemption letter and subsection is what actually determines FUTA liability here, well beyond the general label "nonprofit" that both categories share in everyday conversation. A 501(c)(6) trade association that assumes it qualifies for the same FUTA exemption a 501(c)(3) charity enjoys, purely because both hold some form of tax-exempt status, is exactly the kind of mismatch most likely to surface at an IRS audit, well after the point where it would have been cheap to fix.
Do self-employed individuals pay FUTA?
No. FUTA is an employer-only tax on wages paid to employees; a self-employed individual has no employees in that specific role and pays Self-Employment Contributions Act, SECA, tax instead, per the IRS's self-employment tax guidance, which covers the self-employed equivalent of Social Security and Medicare taxes. The moment that same self-employed individual hires even one employee, FUTA liability becomes a live question for that employer role, evaluated separately from the owner's own SECA obligation, which continues to apply to the owner's own self-employment income regardless of whether the business also has employees. A sole proprietor who has always filed Schedule C and paid SECA on their own income has to add this second, entirely distinct evaluation the moment their first employee's hire crosses either the wage or headcount test.
Contractors and Mixed Workforces
Do I need to file Form 940 if I only used contractors last year?
Generally no, provided every worker paid last year was a genuine 1099 independent contractor and not a W-2 employee in substance. Payments to independent contractors don't count toward the FUTA wage or headcount thresholds at all, per the IRS's guidance distinguishing employees from independent contractors, since FUTA liability is built entirely around the employer-employee relationship. That answer depends entirely on the workers actually being contractors in substance, a determination that looks past however the engagement happens to be labeled on an invoice; a worker misclassified as a contractor when the underlying relationship meets the IRS's employee test can retroactively create FUTA liability the employer didn't realize it had, evaluated under the IRS's own common-law control test covering behavioral control, financial control, and the relationship of the parties.
Which employers are required to pay FUTA, and do my headcount or quarterly wage levels trigger it?
Employers who meet the general test, $1,500 or more in wages in any calendar quarter or 20 or more weeks of employment, are required to pay FUTA, evaluated against W-2 headcount and wages only. Independent contractors paid on a 1099 basis are excluded from both prongs of that count entirely, which means a company with a substantial contractor workforce and only a handful of W-2 employees evaluates its FUTA liability against just that small W-2 headcount, without any contribution from the contractor relationships at all. A company transitioning from an all-contractor model to its first few W-2 hires should re-run this threshold check specifically at that transition point, since crossing from zero W-2 employees to even one or two can be enough to trigger the general test's wage or headcount prong depending on how much those first employees are paid.
Is SUTA mandatory, and how does it interact with FUTA?
Yes, SUTA, state unemployment tax, is a separate and generally mandatory state-level obligation from FUTA; the two aren't interchangeable, and paying one doesn't substitute for the other. Most employers owe state unemployment tax regardless of their FUTA status, and specifically, paying SUTA on time and in full is what generates the 5.4% federal FUTA credit described above, reducing the effective FUTA rate from 6.0% down to 0.6%. A state with an unresolved federal unemployment loan balance can reduce that credit for every employer in that state, raising the effective FUTA rate above 0.6% regardless of any individual employer's own SUTA payment history, typically in increments of roughly 0.3% for each year the state's loan balance goes unresolved. California's own situation, covered in a later question on this page, is the clearest current example of this mechanism actually playing out in practice.
Penalties and Compliance Risk
What penalties apply if I miss a Form 940 filing or FUTA deposit?
A late Form 940 filing carries a failure-to-file penalty of 5% of the unpaid tax per month or part of a month the return is late, generally capped at 25% of the unpaid amount. A late deposit carries its own separate failure-to-deposit penalty, scaling with how late the deposit comes: 2% for 1 to 5 days late, 5% for 6 to 15 days late, 10% for 16 or more days late, and 15% once 10 days have passed after the IRS issues a notice demanding payment, per IRS Publication 15. Those two penalty structures, failure-to-file and failure-to-deposit, can both apply to the same late Form 940 if both the filing and the deposit were late, which means a single delayed filing can carry two separate, stacking penalty calculations rather than one. Reasonable-cause relief exists for both penalty types, but it requires demonstrating the failure wasn't due to willful neglect, a higher bar than simply explaining an internal scheduling oversight after the fact.
What are the compliance risks of misclassifying workers and FUTA responsibility?
Misclassifying an employee as an independent contractor to avoid FUTA, FICA, and income tax withholding obligations creates a specific, elevated IRS risk: reclassification under Internal Revenue Code Section 3509, which can impose reduced but still substantial back-tax rates on the employer for the misclassified wages, generally reaching back three years, per the IRS's guidance distinguishing employees from independent contractors. A single misclassified worker discovered in an audit rarely stays isolated; the same classification logic the employer applied to one worker typically applied to an entire category of similarly-situated workers, which is what turns one misclassification finding into a broader multi-year, multi-worker liability. The Section 3509 reduced rates exist specifically because the standard employment tax rates would otherwise apply in full to every misclassified wage going back three years, on top of penalties and interest, which is why even the reduced rates under a Section 3509 assessment can add up to a meaningful liability across an entire misclassified worker category. Asure's HR Compliance service reviews exactly this kind of borderline classification call for growth-stage employers, applying the same behavioral-control, financial-control, and relationship-of-the-parties test the IRS uses before a single misclassified worker turns into a whole category the IRS treats the same way.
Who pays FUTA tax in California, and does the credit reduction affect me?
The employer, the same as in every state, but California's effective rate has run above the standard 0.6% for several consecutive years due to a federal unemployment insurance loan balance the state took on during the COVID-19 pandemic, not a leftover Great Recession debt; California's UI fund became insolvent in 2020 and the state has borrowed from the federal government continuously since, per California's Employment Development Department. California was assessed a 1.2% FUTA credit reduction for 2025, bringing its net effective FUTA rate to 1.8%, $126 per employee for the year, per the U.S. Department of Labor's Federal Register notice of 2025 FUTA credit reductions, and the Department of Labor has again flagged California as a likely credit-reduction candidate for 2026. As of August 2026, that 2026 determination is not yet final; the U.S. Department of Labor doesn't confirm the year's credit-reduction states and exact reduction percentages until after November 10 of that year, so any employer with California payroll should budget for a higher-than-0.6% effective FUTA rate and confirm the exact figure once the federal determination is published later in the year.
How do I know whether my business is required to file Form 940?
Run through the same two-part test described above: first, check whether wages and headcount meet the general test, the household test, or the agricultural test for your specific type of workforce, counting only W-2 employees, not 1099 contractors. Second, check whether a statutory exemption, 501(c)(3) status, government employer status, or a qualifying family-employment arrangement, removes the liability entirely even if a wage or headcount threshold was technically met. An employer that clears the first check and doesn't qualify for the second is a Form 940 filer for that year.
Learn More
FUTA liability comes down to the same two-part question every time: does a wage or headcount threshold get met, and does a statutory exemption apply anyway. Getting either half wrong, filing when a real exemption applies, or skipping a filing when a threshold was actually met, carries real cost, from a missed-filing penalty to Section 3509 reclassification exposure that reaches back three years. Asure's full breakdown of why not every employer owes FUTA walks through the underlying decision process behind every answer in this hub. For a growth-stage B2B employer, that means tracking headcount and wage thresholds as new hires are added rather than checking them once a year: AsureCentral surfaces that tracking for a company running payroll in-house, AsureWorks's specialists handle it as part of managed payroll, and either path is grounded in the same worker-classification review Asure's HR Compliance service applies to the borderline calls this hub keeps surfacing.
