I still remember a January where we had three clients operating in credit reduction states – California, New York, and the Virgin Islands – and not one of them had flagged it during year-end payroll cleanup. We caught it only when reconciling the 940 worksheets, and that late discovery created a scramble that could have been entirely avoided with a simple Schedule A checklist built into our SOPs.
Download Form 940 (Schedule A) PDF
Key Takeaways
- Schedule A is required on every Form 940 filed by an employer who paid wages in more than one state, or who paid wages in any state subject to FUTA credit reduction.
- Credit reduction states are those that borrowed from the federal unemployment trust fund and have not fully repaid it – the IRS publishes the list annually each November or December.
- The standard Form 940 FUTA rate is 6.0%, but employers normally claim a 5.4% credit for state unemployment taxes paid, netting 0.6%. Credit reduction states reduce that offset, raising effective FUTA costs.
- Due date mirrors Form 940: January 31 for the prior calendar year (extended to February 10 if all FUTA deposits were made on time).
- The biggest pitfall is applying the credit reduction to the wrong taxable wage base or missing a state entirely when employees worked across multiple locations during the year.
- Quick rule you can copy into your SOP: pull the IRS Notice 1036 or Revenue Procedure each November to confirm credit reduction states before December payroll closes.
What Form 940 Schedule A Is and When to Use It
Form 940 Schedule A – officially titled “Multi-State Employer and Credit Reduction Information” – is an attachment to the core Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return. Any employer who paid FUTA-taxable wages in more than one state during the year must complete Schedule A. It also catches employers who paid wages in any state designated as a credit reduction state for that year, even if they only operate in one state.
The schedule has two distinct purposes. First, it collects state-level FUTA taxable wage totals so the IRS can verify the employer’s credit calculations. Second, it applies the credit reduction percentage to wages paid in credit reduction states, effectively increasing the employer’s net FUTA liability for those states.
From my side of the desk, the multi-state aspect catches firms off guard more often than the credit reduction side. A client with employees who relocated mid-year, traveled for extended project work, or worked remotely from a new state is suddenly a multi-state employer – and that triggers Schedule A even if no credit reduction state is involved.
Who Must File Schedule A
An employer must attach Schedule A to Form 940 if they fall into either of these categories: (1) they paid wages in more than one state during the calendar year, or (2) they paid wages in any state that the IRS has designated as a credit reduction state for that filing year. The two categories overlap but are not identical – a single-state employer in a credit reduction state still needs the schedule.
What Credit Reduction Means in Practice
The credit reduction reduces the 5.4% normal FUTA credit by a percentage ranging from 0.3% to 2.1% or higher, depending on how long a state has had an outstanding federal loan balance. A 0.3% credit reduction on a $7,000 taxable wage base per employee translates to $21 of additional FUTA tax per worker. At 50 employees in one affected state, that’s $1,050 in unanticipated tax – small for a large firm but real money for a smaller practice.
The Annual Publication Cycle
The IRS announces credit reduction states for each tax year in late November or early December. The information typically appears in IRS Notice 1036 and is also embedded in the updated Form 940 instructions released for that tax year. My team adds a calendar reminder to check the IRS website the first week of December every year, without exception.
How to Complete Form 940 Schedule A
Schedule A is a one-page form organized as a grid of all 50 states plus the District of Columbia and U.S. territories. Each entry on the schedule feeds directly into Line 11 of Form 940. Here is how to work through it accurately.
Part 1: States Where You Paid Wages
Check the box for every state where you paid FUTA-taxable wages during the year. “Paid wages” means wages were earned and paid in that state, not merely that an employee physically passed through. If an employee worked in Texas for ten months and then relocated to California for two months, check both states.
| Step | Action | Practitioner Note |
|---|---|---|
| 1 | Check each state where FUTA wages were paid | Tie to payroll tax jurisdiction records, not just employee addresses |
| 2 | Enter FUTA taxable wages for each state | Cap at $7,000 per employee; excess wages are excluded |
| 3 | Identify credit reduction states from IRS list | Confirm against the most current IRS Form 940 instructions for the year |
| 4 | Apply credit reduction rate to taxable wages for those states | Rate varies by state; California has historically carried a 0.9% reduction |
| 5 | Total all credit reduction amounts | This sum flows to Form 940, Line 11 |
Calculating FUTA Taxable Wages Per State
The FUTA taxable wage base is $7,000 per employee per year. If an employee earned $50,000 during the year, only the first $7,000 is FUTA-taxable. For employees who worked across multiple states, you must allocate the $7,000 cap proportionally across states based on when the wages were paid, not where the employee currently lives.
Most payroll systems will generate a state-level FUTA taxable wage report. I always reconcile that report against the W-2 box 16 totals to catch any state that the payroll system may have coded incorrectly.
Credit Reduction Calculation Line by Line
For each credit reduction state on the schedule, multiply the FUTA taxable wages paid in that state by the applicable credit reduction rate. The result is your additional FUTA tax owed for that state. Sum all state credit reduction amounts and enter the total on the designated line of Schedule A, which then transfers to Form 940 Line 11.
Tying Schedule A Back to Form 940
Line 11 on Form 940 asks for total credit reductions. The sum you calculated on Schedule A goes here. If you leave this line blank when a credit reduction applies, the IRS will send a CP2000 or a notice adjusting your liability. Small errors create big cleanup.
Deadlines, Penalties, and Filing Requirements
Schedule A has no separate filing deadline; it follows Form 940 exactly. But the deposit rules and penalty structure are worth understanding independently because FUTA deposits are quarterly, while the return is annual.
| Event | Due Date | Notes |
|---|---|---|
| Form 940 (and Schedule A) filing | January 31 | For the prior calendar year |
| Extended filing deadline | February 10 | Only if all required FUTA deposits were timely made |
| Quarterly FUTA deposit (if liability exceeds $500) | Last day of the month following quarter-end | April 30, July 31, October 31, January 31 |
| Annual credit reduction payment | January 31 | Credit reduction amounts not covered by deposits are due with the return |
Failure-to-File Penalties
The IRS assesses a 5% per month penalty on unpaid tax, up to 25%, for late filing of Form 940. If the late filing also reflects unpaid FUTA tax from credit reductions that were not deposited, the failure-to-deposit penalty (FTD) applies separately at rates of 2%, 5%, 10%, or 15%, depending on how many days late the deposit is.
Electronic Filing Thresholds
Employers who file at least 10 information returns in a calendar year are required to file electronically. The IRS also encourages e-filing for all Form 940 submissions through their e-file for Business portal. Most payroll software handles this automatically.
Understanding Credit Reduction States: A Deeper Look
Credit reduction states arise under the Federal Unemployment Tax Act framework. When a state’s unemployment trust fund runs out during a recession, the state borrows from the federal government to keep paying benefits. If that loan is not repaid within two years, the IRS reduces the employer’s normal FUTA credit by 0.3% for each year the debt remains outstanding.
Historical Context
Following the 2008–2009 recession, more than 20 states carried credit reductions for multiple years. By the mid-2010s, most had repaid their loans. The COVID-19 pandemic created new borrowing, though the timeline for repayment varied significantly by state. My team has seen California carry credit reductions for nearly a decade at various points – a meaningful cost for employers with large California headcounts.
How the Rate Escalates
Year 1 of an outstanding loan: 0.3% credit reduction. Year 2: 0.6%. Year 3 and beyond: additional increments apply, and the IRS also applies a Benefit Cost Rate (BCR) add-on for states with particularly high borrowing relative to taxable wages. This can push effective credit reductions well above 1.0% in some years for high-debt states.
Planning for Credit Reduction States
If you have clients in states with persistent trust fund deficits, I recommend building a provisional FUTA liability adjustment into your payroll accruals as early as Q3. This prevents a year-end surprise when the IRS officially announces the credit reduction states. Firms that wait until January to calculate the additional liability often scramble to fund the deposit before the return deadline.
Multi-State Wage Allocation on Schedule A
The multi-state aspect of Schedule A trips up firms that grew through remote work adoption. Before 2020, most small employers had employees in one or two states. By 2022, many had employees scattered across ten or more states, which created a significant compliance surface on Schedule A.
Allocating Wages When an Employee Works in Multiple States
The IRS does not provide explicit allocation guidance in the Form 940 instructions, so firms default to the same method used for state unemployment insurance (SUI) purposes. The four-factor test – localization, base of operations, direction or control, and residence – determines which state has jurisdiction. For FUTA purposes, wages are generally allocated to the state where the employee performs services, with SUI jurisdiction serving as the proxy.
Remote Work Complications
When an employee works remotely from a state where the employer has no registered presence, the employer may still owe SUI in that employee’s state of residence. If SUI is owed in that state, the FUTA wages for that employee should be reflected on Schedule A for that state as well. I see firms miss this regularly when their payroll address does not match where the employee actually works.
Acquiring a New Entity Mid-Year
If your client acquired a business mid-year and inherited employees in new states, those states must be included on Schedule A for the acquisition year even if the acquirer had no presence there before. The Form 941 Schedule D handles payroll discrepancies from acquisitions and mergers on the 941 side – similar care is needed on Schedule A for 940 purposes.
Common Mistakes That Slow Things Down
- Not checking for credit reduction states until January filing time – The IRS announces credit reduction states in November or December. Build a Q4 calendar reminder to check and pre-fund any additional FUTA liability before year-end.
- Applying credit reduction to total wages instead of FUTA taxable wages – The credit reduction applies only to the first $7,000 of each employee’s wages paid in the credit reduction state, not total compensation.
- Missing states where remote workers reside – If an employee works from home in a state where the employer pays SUI, that state belongs on Schedule A. Review SUI tax accounts to identify every state where payroll taxes are being remitted.
- Forgetting U.S. territories – The Virgin Islands has historically been a credit reduction territory. If your client had employees there, it appears on Schedule A just like a state.
- Leaving Line 11 blank on Form 940 – If Schedule A shows a credit reduction balance, it must flow to Line 11. Omitting it causes an IRS notice and a recalculated balance due with interest.
- Miscounting employees who changed states mid-year – The $7,000 FUTA taxable wage cap is per employee per year, not per state per year. A single employee earning $7,000 in State A and $20,000 in State B has no additional FUTA taxable wages to report for State B.
- Using last year’s credit reduction rates – Rates change annually. A state at 0.6% last year may be at 0.9% or fully cleared this year. Always pull the current-year Form 940 instructions before completing the schedule.
Practical Checklists You Can Reuse
Copy these into your internal wiki or SOP.
Schedule A Pre-Filing Checklist
- Confirm all states where the client paid SUI (state unemployment insurance) during the year
- Pull IRS credit reduction state list for the applicable tax year
- Obtain state-level FUTA taxable wage summary from payroll system
- Verify the $7,000 cap has been applied per employee, not per state
- Allocate wages for employees who worked in multiple states using SUI jurisdiction as guide
- Calculate credit reduction amount for each affected state
- Sum all credit reduction amounts for transfer to Form 940 Line 11
- Confirm any outstanding FUTA deposits have been credited against the expected balance due
Multi-State Wage Review Checklist
- Cross-reference W-2 state entries against Schedule A state list
- Check for employees who relocated or worked remotely in new states after March 1
- Verify SUI accounts are registered in every state where an employee was paid
- Confirm U.S. territories (Virgin Islands, Puerto Rico) are included if applicable
- Reconcile total FUTA taxable wages on Schedule A against Form 940, Line 7
- Review mid-year acquisitions for inherited employee states
Year-End FUTA Planning Checklist
- Pull Q4 state unemployment borrowing data from Department of Labor website
- Review IRS announcement (typically Revenue Procedure or Notice) for credit reduction states
- Estimate additional FUTA liability for any credit reduction states and accrue in payroll
- Ensure Q4 FUTA deposit covers both regular FUTA and credit reduction amounts if combined liability exceeds $500
- Notify clients in credit reduction states of the additional year-end liability before January
- Prepare Schedule A draft before Form 940 completion so Line 11 is populated correctly from the start
For Accounting Firms – Keep Delivery Smooth While You Scale
Payroll compliance work like Schedule A is exactly the type of task that creates quiet bottlenecks during filing season. The analysis is straightforward when your SOPs are tight, but when it gets buried under 940s, 941s, W-2s, and state reconciliations all due within the same two-week window, details slip. Firms that build structured offshore delivery for payroll tax support report fewer surprises on year-end FUTA returns, better credit reduction state tracking, and significantly reduced review time for partners handling compliance-heavy books.
Accountably works with CPA and EA firms to build offshore delivery systems that handle payroll compliance tasks, including Schedule A preparation and review, with the same precision as in-house staff – without adding headcount to your local roster. We keep this mention brief on purpose, your process comes first.
FAQs About Form 940 Schedule A
What is Form 940 Schedule A used for?
Schedule A is used by multi-state employers and employers in credit reduction states to report state-level FUTA taxable wages and calculate any additional FUTA tax owed due to credit reductions. It is an attachment to Form 940 and is required whenever either condition applies. The credit reduction total from Schedule A flows directly to Line 11 of Form 940.
Who is required to file Schedule A?
Any employer that paid FUTA-taxable wages in more than one state during the calendar year must file Schedule A. Additionally, any employer that paid wages in a state designated as a credit reduction state by the IRS for that year must file the schedule – even if they only operate in that one state. The IRS publishes the credit reduction state list in the Form 940 instructions for each tax year.
When is Schedule A due?
Schedule A is filed as part of Form 940 and follows the same deadline: January 31 for the prior calendar year. If all required FUTA deposits were made on time, the deadline extends to February 10. There is no separate extension form for Schedule A beyond the Form 940 extension process.
What are credit reduction states and how do they affect FUTA?
Credit reduction states are states that borrowed from the federal unemployment trust fund and have not fully repaid the loan within the required period. The IRS reduces the normal 5.4% FUTA credit for wages paid in these states, typically by 0.3% for each year the debt remains outstanding. This increases the effective FUTA tax rate on wages paid in those states and requires the additional tax to be calculated and reported on Schedule A.
How do I calculate the credit reduction on Schedule A?
For each credit reduction state, multiply the FUTA taxable wages you paid in that state (capped at $7,000 per employee per year) by the applicable credit reduction rate for that state in that tax year. Sum the results for all credit reduction states and enter the total on Schedule A and on Form 940 Line 11. The credit reduction rates are listed in the Form 940 instructions published by the IRS each fall.
Can a single-state employer be required to file Schedule A?
Yes. If the single state where the employer operates is designated as a credit reduction state for that tax year, Schedule A is still required. The multi-state checkbox condition and the credit reduction state condition are independent – meeting either one triggers the Schedule A filing requirement. Verify each year whether your client’s state of operation appears on the IRS credit reduction list.
This article is educational, not tax advice. Rules change, and states differ. Confirm thresholds, deadlines, and elections against the current IRS instructions for your year and facts.