Are you a small business owner with employees? Even if you had only one worker this year, you need to manage your FUTA taxes, and send Schedule A and Form 940 to the IRS. What is Schedule A (Form 940)?
Schedule A (Form 940) is a supplemental form that you attach to Form 940. You use Schedule A to determine your annual FUTA tax. This worksheet is especially important if you live in a credit reduction state.
To get you started, let’s break down FUTA taxes and Schedule A.
What are FUTA taxes?
FUTA taxes help fund state unemployment programs. Employers in each state pay a tax on every employee’s paycheck. The tax goes towards employees who have lost their jobs as they look for more work.
All businesses have to pay FUTA taxes in the states where they operate. That means that any business paying wages in two or more states has to pay FUTA taxes in each state.
Normally, employers pay the standard FUTA rate of 6% on the first $7,000 of an employee’s wages.
States can receive the standard tax credit of 5.4%. That means a business owner in that state only pays 0.6% of the first $7,000 in wages for each employee. The tax credit brings the FUTA tax obligation down to $42 per employee every year for eligible states.
Credit reduction states
States need significant 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, it might become a credit reduction state. Employers in these states receive a lower credit on their FUTA tax rates.
Employers in credit reduction states must pay a higher FUTA rate when they complete Schedule A (Form 940). The higher rate helps the state reduce its line of credit.
The credit reduction is 0.3% of the tax credit every year until they completely pay off the federal loan. Since the credit is reduced by 0.3%, the credit is 5.1% (5.4% – 0.3%). That makes the FUTA rate 0.9% (6% – 5.1%) for the first year that the state was penalized. The penalty makes an employer’s FUTA tax obligations about $63 per employee per year.
The next year, the credit reduction state must pay 1.2% in FUTA taxes. The amount continues to increase until the state pays off its loan. Employers might have to pay extra penalties in the fifth year the state has outstanding loans. These penalties can be waived if the state applies for a waiver and meets specific guidelines.
States with a credit reduction
Employers in the following states are subject to higher FUTA taxes due to a credit reduction:
- U.S. Virgin Islands
Return to the standard credit rate
When a state pays off its federal unemployment loans, it gets the standard FUTA tax credit. The loan must be repaid by November 10 of the current year to qualify.
The state may apply for additional waivers if it meets specific conditions. The state may
be subject to other reductions, depending on the loan amount and other factors.
Finding your FUTA tax rate with Schedule A
To calculate your FUTA tax rate, complete Schedule A (Form 940). Schedule A 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 Form 940.
When is Schedule A (Form 940) due?
To file Schedule A, attach it to your Form 940. Send Schedule A with Form 940 to the IRS by January 31.
Refer to the Instructions for Form 940 for the proper way to send the form. Note that there are different mailing addresses depending on whether a payment is required.
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This article was updated from its original publication date of 12/2/2015.