Which states are credit reduction states for FUTA purposes?

The Department of Labor certifies credit reduction states each November based on which states have not repaid their federal unemployment trust fund loans within the required timeframe. The list changes annually, so employers should check the most recent IRS Schedule A (updated for the current tax year) and the Department of Labor's website each fall to identify affected states. Historically, states like California, New York, and the U.S. Virgin Islands have appeared on the list in various years.

How do I calculate the credit reduction on Schedule A?

For each credit reduction state where you paid wages, multiply the FUTA taxable wages (capped at $7,000 per employee for the full year) paid in that state by the published credit reduction rate for that state—typically 0.3% (0.003) for the first year of non-repayment, increasing by 0.3% for each subsequent year. Add the subtotals for all credit reduction states together to get the total credit reduction, which then carries to Form 940.

Do I need to file Schedule A if I only paid wages in one state?

Not if that single state is not a credit reduction state. Schedule A is required when you paid wages in multiple states or in at least one credit reduction state. If you paid wages only in a single state that has no credit reduction designation for the year, you can skip Schedule A entirely and note the single state directly on Form 940.

When is Form 940 Schedule A due?

Schedule A has no independent due date—it is filed as an attachment to Form 940, which is due by January 31 of the year following the tax year (for example, January 31, 2027 for the 2026 tax year). If January 31 falls on a weekend or federal holiday, the deadline shifts to the next business day. Late filing of Form 940 with a missing or incomplete Schedule A can trigger the same penalties that apply to a late or incomplete Form 940.

How does credit reduction affect my FUTA tax deposits during the year?

Because credit reduction is officially determined in November, FUTA deposits made throughout the year are calculated without the credit reduction. Any additional tax resulting from the credit reduction is typically included in the final year-end payment or deposit when Form 940 is filed by January 31. If the additional amount due is relatively small, a penalty for late deposit generally does not apply, but employers in states that have carried credit reduction status for multiple years often adjust their Q4 deposits upward to avoid a large year-end balance.

What penalties apply if I omit Schedule A from my Form 940 filing?

Omitting Schedule A when it is required is treated as an incomplete Form 940 filing and subjects the employer to the same penalty structure that applies to Form 940 itself—generally 5% of the unpaid tax per month the return is late, up to a 25% maximum, plus potential failure-to-deposit penalties if the credit reduction amount should have been deposited. The IRS may also issue a notice requesting the missing schedule, which adds administrative burden and scrutiny to the account.

Employment Taxes

Form 940 Schedule A: Multi-State Employer and Credit Reduction Information

Used by employers who paid wages in states subject to a credit reduction or who paid wages in multiple states, as part of their Form 940 filing.

Download Form 940 Schedule A PDF About on IRS.gov

Overview

IRS Form 940 Schedule A, titled 'Multi-State Employer and Credit Reduction Information,' is a supplemental schedule that attaches to the annual Federal Unemployment Tax Act (FUTA) return, Form 940. It serves two distinct but related purposes: identifying every state in which an employer paid wages during the year, and calculating any credit reduction that applies when a state has an outstanding federal unemployment loan balance. Under IRC Section 3301 through 3311, employers are generally entitled to a credit of up to 5.4% against the 6.0% gross FUTA tax rate when they pay state unemployment taxes on time—bringing the net FUTA rate down to 0.6%. Schedule A is the mechanism by which that credit is verified and, where necessary, reduced.

Credit reduction occurs when a state has borrowed from the federal unemployment trust fund and has not repaid the loan within the required timeframe. The Department of Labor certifies affected states each November, and employers in those states must reduce the 5.4% credit by a specified percentage—typically 0.3% for the first year of non-repayment, increasing in subsequent years. The result is a higher effective FUTA tax liability for employers operating in those states. Schedule A quantifies this additional tax so it can flow correctly to line 11 of Form 940.

For employers who paid wages in more than one state—even if no credit reduction state is involved—Schedule A is still required to identify each state where FUTA taxable wages were paid. This multi-state reporting requirement helps the IRS reconcile employer FUTA obligations across state lines and ensures that the correct state unemployment tax credits are applied. Most employers with employees in multiple states, or any employer in a credit reduction state, will need to complete this schedule annually as part of their January 31 Form 940 filing.

Who Files This Form?

Schedule A must be attached to Form 940 whenever either of the following conditions applies during the tax year.

First, any employer who paid FUTA taxable wages in more than one state must complete Schedule A, even if no credit reduction states are involved. This means a business with employees in, say, three states must check each applicable state on the schedule and report the FUTA taxable wages paid to workers in each state. The term 'FUTA taxable wages' refers to the first $7,000 paid to each employee during the calendar year—wages above that threshold are excluded.

Second, any employer who paid wages in a state that the Department of Labor has designated as a credit reduction state for that tax year must complete Schedule A and calculate the resulting additional FUTA tax. The IRS updates the schedule each year to reflect the current list of credit reduction states and the applicable reduction percentages; employers should use the version of the schedule issued for the relevant tax year.

Edge cases and exceptions to be aware of: Employers in U.S. territories such as the U.S. Virgin Islands, Puerto Rico, or other possessions may also appear on Schedule A if those jurisdictions carry credit reduction status. Household employers who file Schedule H rather than Form 940 do not use Schedule A. Agricultural employers who file Form 943 also do not use this schedule. An employer who paid wages exclusively in one non-credit-reduction state and owes no additional FUTA tax does not need to file Schedule A, though good practice is to confirm the state's status each November before finalizing the return. Successor employers who acquired a business mid-year should include wages paid by the predecessor for Schedule A purposes if they elected to include those wages on Form 940.

Key Fields

State Checkboxes (Part 1): States where wages were paid

Employers check the box for every state in which they paid FUTA taxable wages during the year. Each state abbreviation appears on the schedule in a grid format. Checking a state does not automatically create a credit reduction obligation—it simply establishes the multi-state filing requirement. Failing to check all applicable states is a common audit flag.

FUTA Taxable Wages by State

For each checked state, the employer enters the total FUTA taxable wages paid in that state—meaning the first $7,000 paid to each employee in the calendar year, not total gross wages. Wages paid after the $7,000 per-employee annual wage base is reached are excluded. Errors here often arise when payroll is allocated across states for a single employee who works in multiple locations.

Credit Reduction States Column

Only states identified by the Department of Labor as credit reduction states for the current year appear in this column. The pre-printed reduction rate for each such state is shown on the schedule; the employer simply enters the FUTA taxable wages paid in that state. If a state appears here and you paid no wages there, enter zero rather than leaving the field blank to avoid processing errors.

Credit Reduction Amount by State

This is the product of FUTA taxable wages in a credit reduction state multiplied by the applicable credit reduction rate (e.g., 0.003 for a 0.3% reduction). Each state's subtotal is calculated separately before being summed. This line quantifies the extra FUTA cost to the employer for operating in a state with an outstanding federal loan.

Total Credit Reduction (Line carried to Form 940)

All individual state credit reduction amounts are totaled and carried to the appropriate line on Form 940 (line 11 on the 2024 version of the form). This amount increases the employer's total FUTA tax liability and must be reflected in any FUTA deposits if the cumulative quarterly FUTA liability exceeds $500. Forgetting to transfer this figure to Form 940 is one of the most consequential errors on this schedule.

U.S. Virgin Islands / Other Possessions Entries

The U.S. Virgin Islands has historically been designated as a credit reduction jurisdiction in multiple years. If wages were paid to employees working in a U.S. territory that carries credit reduction status, those wages and the resulting credit reduction must be entered on Schedule A in the same manner as any state. The reduction rate for territories can be higher than for the 50 states, so review the current-year schedule instructions carefully.

Employer Identification Number (EIN) and Tax Year Header

Schedule A must include the employer's EIN and the applicable tax year at the top of the form. These fields link the schedule to the corresponding Form 940. A mismatch or missing EIN can cause the IRS to process the schedule as a standalone, unmatched document, potentially triggering a notice even when the Form 940 itself is complete.

Filing Deadlines

Due Date

January 31

Late Filing Penalty

Filed with Form 940; subject to the same penalties.

Step-by-Step Instructions

1
Confirm whether Schedule A is required by checking two conditions: (1) Did you pay FUTA taxable wages in more than one state or U.S. territory during the year? (2) Has the Department of Labor certified any state where you paid wages as a credit reduction state for this tax year? If either answer is yes, Schedule A is mandatory.
2
Obtain the correct-year version of Schedule A from the IRS website (the form is updated annually to reflect current credit reduction states and rates). Do not use a prior-year version, as the credit reduction states and rates change each November.
3
For each state where you paid FUTA taxable wages, check the corresponding state box in Part 1 of the schedule. Include every state where any employee earned wages during the year, even if total wages in that state were minimal.
4
Calculate FUTA taxable wages for each state. Pull your payroll data and, for each employee who worked in a given state, include only the first $7,000 of wages paid to that employee during the entire calendar year. If an employee worked in multiple states, allocate the wages—and the wage base—carefully based on where the wages were actually earned or sourced.
5
Enter the FUTA taxable wages for each credit reduction state in the designated column. Multiply the wages by the applicable credit reduction rate shown on the pre-printed form for that state. This produces the credit reduction subtotal for that state.
6
Sum all individual state credit reduction amounts to arrive at the total credit reduction for the year. Double-check this arithmetic—a spreadsheet or payroll software export is advisable for employers with workers in multiple credit reduction states.
7
Transfer the total credit reduction amount to the designated line on Form 940 (currently line 11). Verify that this addition correctly increases the total FUTA tax on Form 940 line 12. If your cumulative FUTA liability—inclusive of the credit reduction—exceeded $500 in any quarter, confirm that timely deposits were made throughout the year.
8
Attach Schedule A to Form 940 and file both by January 31 of the year following the tax year (or the next business day if January 31 falls on a weekend or holiday). Schedule A has no separate filing address—it travels with Form 940.
9
Retain a copy of Schedule A with your payroll records for at least four years, consistent with general FUTA record-retention requirements under Treasury Reg. 31.6001-1.

Common Mistakes to Avoid

Using the prior year's Schedule A without checking for updated credit reduction states and rates.

Download a fresh copy of Schedule A from the IRS each November after the Department of Labor publishes its annual credit reduction determination. The list of affected states and their reduction percentages changes from year to year.

Failing to check all states where wages were paid, not just credit reduction states.

Schedule A is required for multi-state employers regardless of credit reduction status. Review your payroll records for every state where at least one employee earned wages, and check each corresponding state box on the schedule.

Applying the full $7,000 FUTA wage base per state rather than per employee across all states combined.

The $7,000 FUTA wage base is an annual per-employee limit that applies in the aggregate, not on a state-by-state basis. Once a single employee has been paid $7,000 in total for the year, additional wages to that employee are excluded from FUTA taxable wages in every state, not just in the state where the $7,000 cap was reached.

Omitting the total credit reduction from Form 940 after completing Schedule A.

The schedule is meaningless unless its total is carried to the correct line on Form 940 and included in the total FUTA tax calculation. After completing Schedule A, explicitly trace the total credit reduction to Form 940 as a final reconciliation step.

Excluding U.S. territories—particularly the U.S. Virgin Islands—from Schedule A when wages were paid there during a year when the territory carried credit reduction status.

U.S. territories can appear on Schedule A as credit reduction jurisdictions. Treat them the same as states: enter FUTA taxable wages and calculate the credit reduction amount using the territory's published rate.

Not adjusting FUTA deposits mid-year when a state is expected to carry credit reduction status.

Because credit reduction is technically determined in November, some employers underdeposit FUTA during the year. Most CPA firms advise monitoring the Department of Labor's loan balance data and making a conservative deposit adjustment in Q4 if credit reduction seems likely, to minimize any underpayment penalty exposure.

Frequently Asked Questions

Form 940 Schedule A is used by employers to report FUTA taxable wages paid in each state where they had employees during the year, and to calculate any additional FUTA tax owed because of credit reductions in states that have outstanding federal unemployment loans. It attaches directly to Form 940 and its totals feed into that form's overall FUTA tax calculation. Employers who paid wages in only one non-credit-reduction state do not need to file it.

Related Forms

Form 940

Employer's Annual Federal Unemployment (FUTA) Tax Return

TaxScout.ai extracts Form 940 Schedule A automatically

AI-powered extraction with 5-layer validation. No manual data entry.