FUTA Credit

The IRS has just released which states in 2020 would be subject to credit reduction for unemployment taxes.

For 2020, the U.S. Virgin Islands (USVI) is the only credit reduction state. The credit reduction rate is 0.03 (3.0%) and is reported on. (Schedule A (Form 940).

This is very good news for most companies.  The bad news is the tax seminars I have attended lately indicate there could be as many as 9 states that are subject to credit reduction in 2022.

For those of you unfamiliar with the term credit reduction it is not a reduction in the number of monies owed in each of the impacted states.  Instead, it means for those states the employer is subject to a 3.0% decrease in the credit it normally received on the Federal Unemployment 940 return.  Employers are normally entitled to a 5.4% decrease on the standard 6% rate charged on the federal 940 but those in a credit reduction status can only apply a 5.1% decrease.  

Unfortunately, most companies can also predict an increase in their unemployment rates starting in 2020 due to the impact COVID 19 has had on employment.  The additional $600 a week in unemployment benefits does not count against the employer’s usage but the regular payments made to employees do count.

The IRS states: 

Reporting the credit reduction

Employers calculate credit reduction using Schedule A (Form 940).

On Schedule A (Form 940), every state has:

• A checkbox (to be checked if an employer-paid state unemployment taxes to that state)
• A box for the FUTA taxable wages the employer paid in that state (to be filled in if the state is a credit reduction state and the employer paid wages subject to UI tax in the state).

The following employers use Schedule A (Form 940):

• Employers that paid FUTA taxable wages and UI tax in more than one state
• Employers that paid FUTA taxable wages and UI tax in any credit reduction state, even if the employer is a single-state employer. These employers report the FUTA taxable wages and multiply by the credit reduction rate (0.3%, 0.6%, 0.9%, etc.) to calculate the total credit reduction, which the employer carries forward to Form 940.

If an employer paid UI taxes to more than one state, it must check all those states on Schedule A (Form 940), whether the states are credit reduction states or not. Additionally, for states that are credit reduction states, employers must enter the FUTA taxable wages the employer paid in that state, even if the employer paid wages in only one state. However, FUTA taxable wages that are excluded from UI are not subject to credit reduction. For more information, see the Instructions for Schedule A (Form 940) PDF.