Form 940 is the once-a-year federal unemployment tax return. If your startup runs payroll, it likely owes one, and your payroll provider may already prepare it. At the full state credit the tax is $42 per employee a year. For 2025 wages paid in California it's three times that, because of a credit reduction that's easy to miss.
This guide covers who files Form 940, how the tax is worked out, the credit reduction that changes the math, and the deadlines. Everything here is from the IRS instructions for the 2025 return and Schedule A.
Who has to file
The Form 940 instructions give two tests. You file if either applies in the current year or the year before:
- You paid wages of $1,500 or more to employees in any calendar quarter.
- You had at least one employee for some part of a day in any 20 or more different weeks.
A founder on a regular salary meets the first test in the first quarter of payroll. Because the tests look back a year, a company that stopped paying wages can still owe a return for the following year.
How the tax works
FUTA tax is 6.0% of the first $7,000 you pay each employee in a calendar year. Wages above $7,000 for that person aren't taxed.
You then get a credit of up to 5.4% for state unemployment tax, if you paid all of your state unemployment tax by the Form 940 due date. With the full credit, the net rate is 0.6%, which on $7,000 is $42 per employee per year.
| Employee's FUTA wages | Rate after full credit | FUTA tax |
|---|---|---|
| $7,000 or more | 0.6% | $42 |
| $3,000 | 0.6% | $18 |
Pay the state tax late and the credit shrinks, so the federal bill goes up.
Credit reduction, and why California costs more
States with outstanding federal loans for unemployment benefits become credit reduction states. Employers there get a smaller credit, which raises their FUTA rate.
For 2025, Schedule A (Form 940) lists two: California at a 1.2% reduction and the U.S. Virgin Islands at 4.5%. For California wages, that takes the effective rate from 0.6% to 1.8%.
| Wages paid in | Effective FUTA rate for 2025 | Tax on $7,000 |
|---|---|---|
| A state with no credit reduction | 0.6% | $42 |
| California | 1.8% | $126 |
| U.S. Virgin Islands | 5.1% | $357 |
The reduction is worked out on Schedule A and carried onto Form 940, so a California company that budgeted for $42 per employee will owe more than it planned.
When you need Schedule A
Schedule A is required if you paid wages subject to state unemployment tax in more than one state, or in a credit reduction state. On it, you list every state where you had to pay state unemployment tax that year, including states whose credit reduction rate is zero.
A startup with one employee in California and everyone else in Texas files Schedule A. So does a company whose only employee is in California.
Deposits during the year
FUTA tax is deposited quarterly, not with the return. If the tax for a quarter is more than $500, deposit it by the last day of the month after the quarter ends. If it's $500 or less, carry it into the next quarter and check again.
At $42 per employee, a company needs roughly a dozen employees at the full wage base before a single quarter crosses $500, so a smaller company may carry the whole year's tax forward to the return.
Deadlines
For 2025, Form 940 was due February 2, 2026, because January 31 fell on a weekend. If you had deposited all of your FUTA tax when it was due, you could file by February 10, 2026. Check the current year's instructions for the next due date rather than assuming January 31.
What to check before it's filed
If a payroll provider prepares and files Form 940, the return is still the company's. Before year-end, check three things in the provider's reports: that the FUTA wage total excludes exempt payments, that every state where you paid unemployment tax is on Schedule A, and that any credit reduction amount is in your year-end numbers.
For the rest of the payroll calendar, see our 2026 startup tax calendar, and for setting payroll up in the first place, how to pay yourself as a startup founder.
Sources: Instructions for Form 940 (2025), Schedule A (Form 940) for 2025, IRS Topic 759.