Form 940 Credit Reduction Changes for 2023

Updated on January 26, 2024 - 10:30 AM by Admin, TaxBandits

For the 2023 tax year, the IRS has introduced several changes to Form 940, and it's important to be aware of these modifications before your 940 filing.

  • Credit Reduction Rate Increase:

    The IRS has raised the credit reduction rate for certain states in the 2023 tax year, resulting in higher Federal Unemployment Tax Act (FUTA) taxes for employers in those states. Specifically, California (CA) and New York (NY) now have a credit reduction rate of 0.6%, while the U.S. Virgin Islands (VI) has a rate of 0.3%.

  • New Form 940 (sp) in Spanish:

    Form 940-PR is no longer available for filing and is effective from the tax year 2023. Instead, all employers, including employers in Puerto Rico and the U.S. Virgin Islands, have the option to file a new Form 940 (sp) for the tax year 2023.

  • Electronically filing an amended Form 940:

    Previously, amendments could only be filed using paper forms. However, starting in 2024 or sometime in between, the IRS plans to introduce electronic filing for amended Form 940.

1. What are the Credit Reduction States for 2023 in Form 940?

Credit Reduction States for 2023 in Form 940?

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.

Employees in these states are subject to additional Federal Unemployment Tax Act (FUTA) obligations. This additional tax is imposed to help repay the outstanding federal loans that the state has not yet settled.

To indicate this credit reduction, employees should check the appropriate box on line 2 of 940 Form and complete 940 Schedule A. This ensures that both employers and employees fulfill their tax obligations related to the credit reduction and the repayment of federal loans used to support the state's unemployment insurance program.

Employers in the following states are subject to higher FUTA taxes due to the credit reduction:

States 2020 2021 2022 2023
California (CA) - - 0.3% 0.6%
Connecticut (CT) - - 0.3% -
Illinois (IL) - - 0.3% -
New York (NY) - - 0.3% 0.6%
U.S. Virgin Islands (VI) 3.0% 3.3% 3.6% 3.9%

Visit to learn more about Form 940 Schedule A.

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2. What is Form 940 Schedule A and who must file it?

Form 940 Schedule A is an additional form that accompanies IRS Form 940 and is relevant for employers facing specific circumstances related to state unemployment tax. It is necessary to file Schedule A under the following conditions:

  • Multi-State Employers:

    If your business operates in more than one state, you are considered a multi-state employer. In this case, you should check the designated box on line 1b of Form 940. Following that, you are required to complete Schedule A (Form 940) and attach it to your Form 940.

  • Credit Reduction States:

    When there are credit reduction states, meaning states where the wages are subject to credit reduction, employers should take specific actions. If you have paid wages subject to the unemployment tax laws of these credit reduction states, you should check the corresponding box on line 2 of Form 940. Subsequently, Schedule A (Form 940) must be filled out and submitted along with Form 940.

3. Due date to file Form 940

The Federal Unemployment Tax Return must be filed annually. The deadline to file Form 940 with the IRS for the 2023 tax year is on January 31, 2024.

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Note: If you have deposited all the FUTA taxes on time, you can e-file 940 by February 10, 2024, instead.

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4. How to e-file Form 940 with TaxBandits?

Follow these 3 simple steps to file Form 940 electronically with TaxBandits:

  • Step 1: Sign in to create a free TaxBandits account!

  • Step 2: Choose "Form 940" and enter the details.

  • Step 3: Review and Transmit to the IRS.

Visit, to learn more about Form 940 online filing.

TaxBandits streamlines your filing and makes the process more convenient, especially by supporting both the
94x online signature PIN and Form 8453-EMP support. Plus, you will receive updates on the IRS status of your form.

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