Form 940 and FUTA Debt: The Payroll Tax That Is Not a Trust Fund Tax

When a business falls behind on payroll taxes, the balance usually includes more than Form 941. There is often an unpaid Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, too. Owners tend to treat it as more of the same.

It is not. FUTA is a tax on the employer, not a tax collected from employees. That single fact moves it outside the Trust Fund Recovery Penalty and changes how it fits into your resolution strategy.

What FUTA Is

IRC 3301 imposes on every employer, for each calendar year, an excise tax with respect to having individuals in its employ, equal to 6 percent of the total wages paid by the employer during the year with respect to employment, as those terms are defined in section 3306.

The key words are "imposed on every employer." Nothing is withheld from employees for FUTA. The employer owes it directly, out of its own funds.

Employers report FUTA annually on Form 940. Some deposits may be required during the year, which we cover below.

Why the TFRP Does Not Reach FUTA

The Trust Fund Recovery Penalty applies to taxes a person is required to collect, account for and pay over. Section 7501 creates the trust for amounts "collected or withheld" from another person.

FUTA is not collected or withheld from anyone. IRM 5.17.7.2.6, the IRS's legal reference guide on the scope of the penalty, says it plainly: the TFRP does not apply to direct taxes such as the employer's portion of FICA or FUTA.

So if your corporation or LLC owes Form 940 tax, the IRS cannot use section 6672 to assess that FUTA against you personally. It remains a business liability, collectible from the business's assets.

When FUTA Can Still Be Personal

"Business liability" depends on the business form.

• Sole proprietorships. The owner is the employer. IRM 5.17.7.2.1 notes the TFRP is not needed to reach a sole proprietor because the owner is personally liable for employment taxes. Section 3301 imposes FUTA on the employer, and in a sole proprietorship the employer is the owner, so Form 940 tax is the owner's own liability.
• General partnerships. IRM 5.17.7.2.1.3 explains that general partners are, as a general rule, individually liable under state law for partnership debts, and assessments are made in the name of the partnership and the general partners. Where state law makes general partners liable for partnership debts, a FUTA balance owed by the partnership may be pursued the same way.
• Single-member LLCs. For wages paid on or after January 1, 2009, Treasury Regulation 301.7701-2(c)(2)(iv) treats an otherwise disregarded LLC as a corporation for employment tax purposes. The regulation's example specifically says the LLC is liable for FUTA and must file Form 940 under its own name and EIN. See our single-member LLC guide.

The Hidden Problem: Where Your Payments Go

Here is why FUTA matters even when it cannot be assessed against you personally. It competes with trust fund taxes for your business's payments.

IRM 5.7.4.3 says that when a taxpayer makes a partial payment on a liability with assessments for more than one period, without specific written instructions, the IRS applies it in the manner serving the best interests of the government. The IRM specifically says consideration will be given to applying payments first to non-trust fund modules such as Form 1120 and Form 940.

Read that from the owner's perspective. The business sends the IRS a check, intending to reduce its payroll tax debt. Without a designation, the IRS may apply it to the Form 940 balance, which you were never personally exposed to, leaving the Form 941 trust fund balance, which you are exposed to, untouched.

The fix is a written designation at the time of payment, identifying the Form 941 quarter and the trust fund portion. IRM 5.7.4.4 sets out the requirements. Our guide to designating payments explains how.

Once the trust fund exposure is resolved, paying FUTA and the other non-trust balances is still the business's obligation. But sequence matters.

FUTA Deposit Rules

Treasury Regulation 31.6302(c)-3 governs FUTA deposits. In general, an employer must deposit FUTA tax for each of the first three calendar quarters by the last day of the first month after the quarter ends.

There is a threshold. Under Regulation 31.6302(c)-3(a)(2), no deposit is required for a period unless the FUTA tax for that period, plus amounts not deposited for prior periods, exceeds $500. For periods ending on or before December 31, 2004, the threshold was $100. Below the threshold, the amount carries forward.

Deposits must be made separately from other deposits, and the electronic funds transfer requirement of Regulation 31.6302-1(h) applies.

FUTA deposits are subject to the failure-to-deposit penalty under IRC 6656, like other depository taxes. IRM 20.1.1 notes that the IRS's automated reasonable cause tool reviews failure-to-deposit penalties on several business return types, including Form 940. See our failure-to-deposit guide.

Resolving Form 940 Debt

Because FUTA is a non-trust fund tax, it fits within the IRS's simpler business payment plan rules. IRM 5.14.5.2, revised in July 2026, describes Simple Payment Plans for BMF non-trust fund liabilities with an aggregate unpaid balance of assessment of $50,000 or less, calculated to full pay by the collection statute expiration date. IRM 5.14.5.1.6 defines BMF non-trust fund liabilities to include corporate income taxes, civil penalties and employment tax liabilities when only the employer's portion remains.

Trust fund balances follow different rules. See our guide to business trust fund payment plans.

Unfiled Forms 940 Still Matter

Some businesses that are behind on Form 941 simply stop filing Form 940. That causes problems beyond the FUTA balance itself. IRS payment plan procedures require filing compliance: IRM 5.14.5.1.1 says business taxpayers with employees must file all required returns before an agreement is granted, and IRM 5.14.5.4 says that if a business is not in filing compliance, a Simple Payment Plan (Business Trust Fund) cannot be granted.

Revenue Officers are also told to look for unfiled returns. IRM 5.7.4.5 includes, among the questions a Revenue Officer answers before submitting a trust fund recommendation, whether all periods have been addressed, including unfiled returns. An unfiled Form 940 is a loose end that can hold up the resolution of everything else. File it, even if the business cannot pay it yet.

Closing the Business

When a business closes, it files a final Form 940 for the year it paid final wages. The IRS's closing-a-business guidance says to check box "d" in the Type of Return section to mark it as final. Our guide on closing a business with payroll tax debt covers the other final returns.

If a corporation closes owing FUTA and has no assets, the FUTA balance is not reachable through the TFRP. Other theories still exist: IRM 5.7.4.2.2 notes the IRS may consider transferee liability or suits to set aside fraudulent transfers when corporate assets were moved out. The trust fund portion of any Form 941 balance does not; that is what the TFRP is for.

Practical Takeaways

1. Separate the payroll tax debt into trust fund and non-trust fund pieces before you plan anything.
2. Designate every voluntary payment so it reduces the trust fund portion first.
3. Do not ignore Form 940 deposits. They carry their own penalties and keep the business out of compliance.
4. If you operate as a sole proprietor or general partnership, assume FUTA can be personal.

For a broader overview of payroll tax problems, see the firm's main site page on payroll taxes.

FUTA cannot follow you home through the trust fund penalty. But undesignated payments to FUTA can leave the part that does follow you home unpaid. Call (813) 229-7100. Let's talk.