Form 940 Schedule A - An Overview

Updated on January 17, 2024 - 10:30 AM by Admin, TaxBandits

Form 940 Schedule A is used by Employers when they are required to pay state unemployment tax in more than one state, or if the paid wages in any state are subject to credit reduction. This form must be attached to the Form 940
when filed.

1. What is Credit Reduction on Form 940?

States need sufficient funds on hand to pay their unemployment insurance benefits. If a state does not have enough funds to cover the costs, it must borrow from the federal government. If a state doesn’t repay the federal loan after two years, then it might become a credit reduction state. Employers in these states will not be able to get full credit for their FUTA tax rates.

The Department of Labor determines these credit reduction states. If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, then the employer must pay additional federal unemployment tax when filing their Form 940.

2. What are the IRS Form 940 Credit Reduction states for 2023?

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%
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3. How to add Schedule A (Form 940) information to IRS Form 940?

If you’re a multi-state employer (operating in more than one state), check the box on line 1b in Form 940. Then fill out Schedule A (Form 940) and attach it to your Form 940.

If there are credit reduction states and If you paid wages subject to the unemployment tax laws of these states, check the box on line 2 in Form 940 and fill out Schedule A (Form 940).

4. How to Calculate 940 FUTA Tax Rate?

To calculate your FUTA tax rate, complete Form 940 Schedule A. It is a worksheet that lists the applicable tax rates in each state. You can find your credit reduction rate on Schedule A of Form 940. Enter your total credit reduction on line 11 of 940 Form.

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