What is Form 940 and FUTA tax?

The short answer

Form 940 is the annual federal return used to report FUTA tax, which stands for Federal Unemployment Tax Act tax. In simple terms, it helps fund unemployment programs. If your business has employees, you may need to file it.

FUTA is usually an employer-paid tax. That means it generally does not come out of your employees’ wages like federal income tax or Social Security and Medicare taxes. Many owners first notice it when they set up payroll or when a payroll provider asks about federal and state unemployment accounts.

The exact rules depend on your payroll situation, your state, and whether you meet the IRS filing thresholds. Rules and deadlines can change, so this is general information only. Confirm your specific requirements with a qualified payroll provider, accountant, or tax professional, and check current IRS and state rules yourself.

Who usually has to file Form 940

Many employers must file Form 940 if they paid wages to employees and meet the IRS test for FUTA. A common rule owners hear is that you may need to file if you paid $1,500 or more in wages in a calendar quarter, or if you had one or more employees for at least part of a day in 20 or more different weeks during the year. There are special rules for household employees, farm workers, and some other situations.

If you are brand new to payroll in the US, the important idea is this: hiring employees can create federal unemployment tax responsibilities, even though the tax is generally paid by the business, not withheld from workers. State unemployment taxes may also apply, and state rules vary.

If you are not sure whether your workers are employees or independent contractors, get professional guidance before you file. Worker classification mistakes can create payroll and tax problems.

How FUTA tax is usually calculated

FUTA is generally based on a small portion of each employee’s wages up to an annual wage limit set under federal rules. Many business owners hear the standard federal FUTA rate and then hear about a possible credit for state unemployment taxes paid on time. That credit can reduce the effective federal cost for many employers, but not always.

In plain English: the business may owe federal unemployment tax on the first part of each employee’s yearly wages, and the actual amount can change depending on your state unemployment situation and whether your state is subject to special federal credit reduction rules.

Because state rules change and some states can affect the final federal amount, do not assume a simple online example matches your business. Confirm the current rate, wage base, and any credits with your payroll provider or tax professional.

When Form 940 is filed and when FUTA is paid

Form 940 is generally filed once a year. Even though the form is annual, FUTA payments may need to be deposited during the year if your accumulated FUTA tax goes over the IRS deposit threshold for a quarter.

A payroll service often tracks this for you, calculates what is due, and handles filings and deposits if that is included in your plan. If you are doing payroll yourself, you need to watch the thresholds and deadlines carefully. Missing a deposit or filing can lead to notices, penalties, or interest.

If you outsource payroll, ask the provider to explain clearly whether they only calculate FUTA or also make deposits and file Form 940 for you. Confirm what's included in writing before you sign.

What a payroll service can help with

A payroll service can often help set up unemployment tax accounts, calculate FUTA, track deposit deadlines, file Form 940, and keep year-end payroll tasks organized. Many also help with pay runs, direct deposit, payroll tax filings, and W-2 or 1099 forms.

Typical payroll pricing for a small business often falls into a monthly base fee plus a per-employee fee. A very rough range might be about $25 to $100+ per month, plus about $4 to $15+ per person paid, with extra charges possible for multi-state payroll, tax filing service, year-end forms, setup, or faster support. These are general ranges, not quotes. The real number depends on team size, pay frequency, what is included, and the state.

RunWise Pay is a free matching service, not a payroll provider, accountant, bookkeeper, or tax advisor. We do not run payroll or file taxes. We help you compare options from participating payroll providers so you can choose who to hire. If you want help comparing options, you can get matched or learn more about payroll services.

• Ask whether Form 940 filing is included
• Ask whether FUTA deposits are included
• Ask whether state unemployment filings are included
• Ask about setup fees, year-end fees, and support response times

Red flags and practical tips before you hire

If a provider is vague about payroll tax filing, be careful. Owners often assume 'full-service payroll' means every filing and deposit is covered, but plans can be different. One provider may include Form 940 and unemployment tax handling, while another may charge extra or leave some steps to you.

Watch for red flags such as vague pricing, hidden fees, no clear tax-filing guarantee, poor support, or pressure to sign fast. If support is hard to reach before you become a customer, that can be a warning sign.

Use this simple checklist when you compare options:
1. Ask exactly which federal, state, and local payroll filings are included.
2. Ask who handles FUTA deposits and Form 940.
3. Ask what happens if a filing is late or incorrect.
4. Ask for all fees in writing, including setup, year-end forms, amendments, and notices.
5. Ask how support works and how quickly they respond.
6. Confirm what's included in writing before you sign.

If you are still learning the basics, our guides can help. And if you want a simpler way to compare providers, RunWise Pay can match you for free. We only collect basic contact and business-intent details like business name, contact name, phone, optional email, how many people you pay, state, and preferred language — never SSNs, EINs, bank account numbers, or employee records.