Blog Post

These Are the States That Will Be Subject to Credit Reduction for Unemployment Taxes

Updated on

January 9, 2023

By

by

Cathy Antle

The IRS has just released which states would be subject to credit reduction for unemployment taxes. This has important implications for those states that are affected and employers that issue wages in these states.

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California, Connecticut, Illinois, and New York, along with the Virgin Islands, did not pay back their federal loans by the November 10, 2022, deadline and will lose the full Federal Unemployment Tax Act (FUTA) credit for 2022, according to the U.S. Department of Labor. The credit reduction rate is 0.03 (3.0%) and is reported on. (Schedule A (Form 940).

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.  

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 Unemployment Insurance [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.

State 2023 WAGE BASE

Alabama $8,000

Alaska 46,800

Arizona 8,000

Arkansas 10,000

California 7,000

Colorado 20,400

Connecticut 15,000

Delaware 14,500

District of Columbia 9,000

Florida 7,000

Georgia 9,500

Hawaii 55,800

Idaho 50,000

Illinois 12,960

Indiana 9,500

Iowa 36,100

Kansas 14,000

Kentucky 10,800

Louisiana 7,700

Maine 12,000

Maryland 8,500

Massachusetts 15,000

Michigan 9,500

Minnesota 41,000

Mississippi 14,000

Missouri 10,500

Montana 40,500

Nebraska 9,000

Nevada 40,100

New Hampshire 14,000

New Jersey 41,100

New Mexico 30,100

New York 12,300

North Carolina 30,000

North Dakota 38,400

Ohio 9,000

Oklahoma 25,700

Oregon 51,600

Pennsylvania 10,000

Rhode Island 24,600

South Carolina 14,000

South Dakota 15,000

Tennessee 7,000

Texas 9,000

Utah 44,300

Vermont 13,500

Virginia 8,000

Washington 67,600

West Virginia 9,000

Wisconsin 14,000

Wyoming 29,100

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