Form 940 for 2026: Key Changes to FUTA Tax,
Dependent Care Limits, and Penalty Relief

What Are the Changes to Form 940 for 2026?

The IRS's 2026 Instructions for Form 940 identify several important updates affecting employers' Federal Unemployment Tax Act (FUTA) returns. The key changes involve dependent care benefits, taxable reimbursements, state credit reductions, and penalty relief.

• FUTA Tax Rate and Wage Base: The FUTA tax rate remains 6.0% on the first $7,000 of each employee's wages. Eligible employers can claim a maximum state unemployment tax credit of 5.4%, resulting in a net FUTA tax rate of 0.6% for most employers.
• Credit reduction state: For 2026, potential credit reduction jurisdictions include California (CA) and the U.S. Virgin Islands (VI), subject to final Department of Labor determinations.
• Increased Dependent Care Assistance Exclusion
  The One Big Beautiful Bill Act (P.L. 119-21) increased the annual exclusion for qualifying dependent care assistance payments beginning
  in 2026.
  • The exclusion increased from $5,000 to $7,500 for most employees.
  • For married employees filing separately, the limit increased from $2,500 to $3,750.
  • Employers should review dependent care benefits to determine the amount that qualifies for exclusion from FUTA tax.
• Moving Expense and Bicycle Commuting Reimbursements: Beginning in 2026, the One Big Beautiful Bill Act eliminated the previous FUTA tax exclusions for qualified moving expense and bicycle commuting reimbursements. Employers must include applicable reimbursements when calculating FUTA-taxable wages and should not report them as FUTA-exempt payments on Form 940, Line 4.
• New Automatic Penalty Relief Program: The IRS Automatic Exemption from Penalty (AEP) program offers eligible Form 940 filers automatic relief from certain penalties based on their prior three years of filing and payment history. Penalties for failing to deposit electronically when required are excluded.

What are the Credit Reduction States?

Credit Reduction States are those states that have borrowed funds from the federal government to cover their unemployment insurance programs but have not repaid the borrowed amount within the specified time frame. When a state fails to repay these federal loans on time, it is classified as a credit reduction state.

Employers who paid wages subject to unemployment tax laws in a credit reduction state may owe additional FUTA tax.

If credit reduction applies to your business:

• Complete Schedule A (Form 940) to calculate the applicable credit reduction.
• Report the credit reduction on Form 940 as instructed by the IRS.
• Account for any additional FUTA liability when planning your fourth-quarter deposit.

Credit Reduction Rates for 2026

What is the filing deadline for Form 940?

Form 940, the Federal Unemployment Return, must be filed annually. The deadline to file Form 940 with the IRS for the 2026 tax year is February 01, 2027.

However, you must deposit the FUTA tax to the IRS if certain tax liability criteria are met. Click here to learn more about the
940 deposit due dates.

Simplify Your Form 940 Filing With TaxBandits

You can e-file Form 940 online with TaxBandits through a guided filing process. Enter your business details, report FUTA-taxable wages and payments, and review your tax calculations. Complete the required forms and attachments, including Schedule A (Form 940) and
Form 8453-EMP when applicable. Sign and submit your return electronically, then track its filing status for IRS updates.

TaxBandits offers built-in tax calculations and error checks to help you review your return before submission. Start Filing Form 940 Online