IRS Form 940 (Schedule A) – IRS Forms, Instructions, Pubs 2026 – As a business owner or payroll manager, navigating federal unemployment taxes can be complex, especially if your operations span multiple states. IRS Form 940, the Employer’s Annual Federal Unemployment (FUTA) Tax Return, is essential for reporting these taxes. But when you’re a multi-state employer or dealing with credit reduction states, Schedule A becomes a critical attachment. This SEO-optimized guide breaks down everything you need to know about IRS Form 940 Schedule A, including who must file it, how to complete it, and the latest credit reduction information for tax year 2025. We’ll draw from official IRS resources to ensure accuracy and compliance.
What Is IRS Form 940 and Why Does Schedule A Matter?
IRS Form 940 is used by employers to report and calculate their annual FUTA tax liability. FUTA taxes fund unemployment benefits at the federal level, with a standard tax rate of 6.0% on the first $7,000 of wages paid to each employee (known as the FUTA wage base). However, employers can claim a credit of up to 5.4% for state unemployment insurance (SUI) taxes paid, reducing the effective FUTA rate to as low as 0.6%.
Schedule A (Form 940) serves two main purposes:
- Multi-State Employers: It helps allocate FUTA taxable wages across states where you paid SUI taxes.
- Credit Reduction Calculation: It figures any reduction in your FUTA credit if you paid wages in states that haven’t repaid federal loans for unemployment benefits (credit reduction states).
Without properly filing Schedule A, you risk underpaying taxes or facing penalties. For tax year 2025, updates include specific credit reduction rates, making it vital to stay informed.
Who Needs to File Schedule A (Form 940)?
Not every employer filing Form 940 needs Schedule A. Here’s when it’s required:
- Multi-State Employers: If you paid state unemployment taxes in more than one state (including the District of Columbia, Puerto Rico, or the U.S. Virgin Islands), check box 1b on Form 940 and attach Schedule A. This applies even if no credit reductions are involved.
- Employers in Credit Reduction States: If you paid wages subject to SUI taxes in a credit reduction state, check box 2 on Form 940 and complete Schedule A to calculate the reduction. For 2025, this impacts employers in California and the U.S. Virgin Islands.
If neither applies, you can skip Schedule A. Always verify your status by reviewing your payroll records and state SUI payments.
Step-by-Step Guide: How to Fill Out IRS Form 940 Schedule A?
Completing Schedule A is straightforward if you follow these steps, based on the official IRS instructions. Download the form from the IRS website: https://www.irs.gov/pub/irs-pdf/f940sa.pdf.
Step 1: Mark States Where You Paid SUI Taxes
- Place an “X” in the box for every state or territory where you paid state unemployment taxes during the year.
- This includes all 50 U.S. states, DC, Puerto Rico (PR), and the U.S. Virgin Islands (VI).
- Use the two-letter postal abbreviations (e.g., CA for California, NY for New York).
Tip: Obtain a state reporting number from each state’s unemployment agency if you don’t have one. Resources are available through the U.S. Department of Labor.
Step 2: Calculate Credit Reductions (If Applicable)
- Only complete this for states with a credit reduction rate greater than zero.
- Enter the FUTA taxable wages paid in each credit reduction state. This is the total wages subject to FUTA (up to $7,000 per employee), excluding:
- Wages exempt from SUI taxes.
- Amounts over the $7,000 FUTA wage base.
- Multiply these wages by the state’s credit reduction rate.
- Example: If you paid $50,000 in FUTA taxable wages in California (rate: 0.012 or 1.2%), the credit reduction is $50,000 × 0.012 = $600.
Step 3: Total and Transfer to Form 940
- Sum all credit reduction amounts.
- Enter the total on Schedule A and transfer it to line 11 on Form 940.
- If you’re also using the worksheet for line 10 (for partial exclusions or late SUI payments), ensure calculations align.
Remember, FUTA taxable wages differ from state unemployment wages—focus on federal rules.
Credit Reduction States for FUTA in 2025: What You Need to Know?
A credit reduction state is one that borrowed federal funds for unemployment benefits but hasn’t fully repaid them. This reduces the FUTA credit available to employers in those states, increasing their effective tax rate.
For tax year 2025:
- California (CA): Credit reduction rate of 1.2% (0.012).
- U.S. Virgin Islands (VI): Credit reduction rate of 4.5% (0.045).
These rates were confirmed after the November 10, 2025, repayment deadline. Connecticut and New York avoided reductions by repaying loans in time.
| State/Territory | Credit Reduction Rate | Impact on FUTA Tax |
|---|---|---|
| California (CA) | 1.2% (0.012) | Increases effective rate by 1.2% on taxable wages |
| U.S. Virgin Islands (VI) | 4.5% (0.045) | Increases effective rate by 4.5% on taxable wages |
If your business operates in these areas, factor the reduction into your tax planning to avoid surprises.
Common Mistakes to Avoid When Filing Form 940 Schedule A?
- Double-Counting Wages: For employees working in multiple states, allocate wages correctly without exceeding the $7,000 FUTA base per employee.
- Missing Deadlines: Form 940 is due January 31, 2026, for 2025 taxes (or the next business day if it falls on a weekend). Deposits may be required quarterly if liability exceeds $500.
- Ignoring Updates: Check IRS.gov annually for new credit reduction states or rate changes.
- Not E-Filing: Electronic filing is encouraged for accuracy and faster processing, especially for amended returns.
FAQs About IRS Form 940 Schedule A
1. What if I’m not in a credit reduction state but am a multi-state employer?
You still need to file Schedule A and mark the states, but no credit reduction calculation is required.
2. How do I handle employee transfers between states?
Prorate the $7,000 wage base across states. For example, if an employee earned $5,000 in a non-reduction state and $3,000 in a reduction state, only $2,000 is taxable in the reduction state.
3. Can I get a waiver for credit reductions?
States can apply for waivers, but individual employers cannot. In 2025, both affected states received waivers for additional add-ons.
4. Where can I find more help?
Visit IRS.gov for forms, instructions, and tools like the Interactive Tax Assistant. Consult a tax professional for personalized advice.
By understanding and properly filing IRS Form 940 Schedule A, you ensure compliance and minimize tax liabilities. Stay updated with IRS announcements, especially for multi-state operations or credit reduction impacts. For the most current details, refer directly to official IRS publications.