Annual IRS Unemployment Tax Forms Confirm FUTA Credit Reduction States

The IRS issued the annual Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, its instructions, and Schedule A (Form 940), Multi-State Employer and Credit Reduction Information, which confirms the FUTA credit reduction states for tax year 2023.

Form 940 is used to report an employer’s annual Federal Unemployment Tax Act (FUTA) tax. Employers are generally liable for this tax if wages of $1,500 or more were paid to employees in any calendar quarter during 2022 and 2023 or one or more employees were employed for at least some part of a day in any 20 or more different weeks in 2022 or 2023 (see Payroll Guide ¶4070).

FUTA applies to the first $7,000 paid to each employee during a calendar year after subtracting any payments exempt from the tax. The tax rate is 6.0%, however, most employers benefit from a 5.4% FUTA tax credit, resulting in a 0.6% net FUTA rate.

However, the FUTA credit may be reduced when a state needs to take a federal unemployment loan and is unable to repay it within two years. The credit is reduced by 0.3% each year thereafter until the advance is made whole. As a result, employers in a credit reduction state pay more in FUTA taxes (see Payroll Guide ¶4075).

The tax year 2023 Form 940 instructions explain that the U.S Department of Labor (DOL) determines these FUTA credit reduction states and makes an announcement shortly after the November 10 deadline to repay the outstanding loans. The instructions also advise employers in these states to use Schedule A (Form 940) to determine the credit reduction.

For tax year 2023, California, New York, and the U.S. Virgin Islands are FUTA credit reduction states. The instructions for Schedule A (Form 940) confirm the DOL’s announcement that employers in both states will be subject to a 0.6% credit reduction and employers in the Virgin Islands will be subject to a 3.9% credit reduction.

Form 940 and Schedule A (Form 940) are due by January 31, 2024 for tax year 2023. Employers subject to the FUTA credit reduction must pay these additional taxes with the filing of their Form 940.

The 2023 Form 940 instructions also explain that all employers, including those in Puerto Rico and the U.S. Virgin Islands, have the option to file a new Spanish version of Form 940 for tax year 2023.

In addition, the instructions advise taxpayers to be aware that the IRS expects to make filing an amended Form 940 available as part of the Modernized e-File sometime in 2024.