The revised drafts of Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return) and Form 940 Schedule A (Multi-State Employer and Credit Reduction Information) released by the IRS reflect a forecast of increased credit reduction rates for California, Connecticut, Illinois, New York, and the Virgin Islands.
Forms 940 and 940 Schedule A.
Employers who have paid either $1,500 of wages or had one or more employees for part of a day for 20 weeks during the year must file Form 940. The form is used to report the Federal Unemployment Tax (FUTA) taxable wages paid to employees throughout the year, as well as the Federal Unemployment Tax either owed or deposited. If an employer operates in a state that is classified as a FUTA credit reduction state for the tax year, additional FUTA tax will be owed on top of the 6.0% rate (see Payroll Guide ¶4255 for more on Form 940).
Updated drafts of Forms 940 and 940 Schedule A.
There are no substantive changes to the draft of Form 940 from the current version aside from the tax year. The draft of Form 940 Schedule A indicates that California, Connecticut, Illinois, New York, and the Virgin Islands will still be in credit reduction status for tax year 2023.
The IRS notes on the draft that according to the U.S. Department of Labor (DOL), California, Connecticut, Illinois, New York, and the U.S. Virgin Islands are subject to credit reduction as of January 1, 2023. The IRS based the draft on that information, however, the DOL will not announce the final credit reduction states until November 2023. The draft forecasts that the credit reduction rates for California, Connecticut, Illinois, and New York will increase from 0.3% to 0.6%, and the credit reduction percentage for the Virgin Islands was not projected. The current credit reduction for the Virgin Islands is 3.6%. The DOL currently projects the 2023 potential credit reduction for the Virgin Islands as 3.9%.
Draft of Form SS-4 also released.
The IRS also released a draft version of Form SS-4 (Application for Employer Identification Number) that removes the option to elect to file Form 944 (Employer’s Annual Federal Tax Return) instead of Form 941 (Employer’s Quarterly Federal Tax Return).
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