IRS Form 940 (FUTA — Federal Unemployment Tax) — Definition Glossary

Defined by Sarah Mitchell, CPA | Reviewed by: James Okafor, EA | Updated May 2026

Full Definition

IRS Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return, filed annually by January 31. FUTA tax is paid solely by the employer — employees do not contribute. The FUTA tax rate is 6% on the first $7,000 of each employee’s wages per year. However, employers who pay state unemployment (SUTA) taxes on time receive a credit of up to 5.4%, effectively reducing the net FUTA rate to 0.6%. Employers must deposit FUTA taxes quarterly if they owe more than $500 during the quarter. FUTA tax debt is separate from 941 payroll tax debt and carries its own deposit schedule and penalty structure. In states that have borrowed from the federal unemployment trust fund and not repaid, employers face a FUTA credit reduction — their effective FUTA rate increases, creating an unexpected additional tax liability.

Why This Matters for Businesses With Tax Debt

Understanding IRS Form 940 (FUTA — Federal Unemployment Tax) is essential for any business owner navigating IRS enforcement or business tax debt. This term directly affects the resolution options available — including whether tax debt financing is a viable solution, how federal tax liens affect the business, and what the IRS can legally collect.

Related Tax Terms

• IRS Form 941
• Payroll Tax Deposit Schedule
• Trust Fund Taxes

Is Your Business Facing This Situation?

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Type of Tax Debt *-- Select Tax Debt Type --IRS 941 Payroll Tax DebtFederal Tax LienIRS Bank Levy (Active Now)Trust Fund Recovery Penalty (TFRP)State Tax DebtOIC Bridge FinancingMultiple Types

Approximate Tax Debt Amount *-- Select Amount --$10,000 - $25,000$25,000 - $50,000$50,000 - $100,000$100,000 - $250,000$250,000 - $500,000$500,000+

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Sources: IRS.gov; Internal Revenue Code (IRC); IRS Publications 1, 594, 1660, 594. Tax Funds is a financing marketplace — not a lender, CPA firm, or law firm. Content is for informational purposes only and does not constitute tax or legal advice.