FUTA Credit Reduction
Now you know what a FUTA credit is. When employer pays unemployment taxes to the IRS and to one or more state governments, it’s double billing. The IRS gives credit for the State tax paid and chops off a chunk owed to the feds.
That nice FUTA credit can be reduced, however, depending on what State we’re dealing with. It’s called a FUTA credit reduction. Yes, that nice FUTA credit can be whittled down if you paid wages in a Credit Reduction State.
IRS form 940 comes with Schedule A (form 940), which you must fill out if you paid wages in a Credit reduction state. By the way you also have to fill it out if you paid wages in more than one state…it’s kind of a multi-purpose form.