Updates to Form 940 and Credit Reduction States for 2022

The IRS has released the information about credit reduction states for TY 2022.

Winter has arrived the holiday season is beginning, which means your year-end filing obligations are right around the corner. The most notable year-end forms include W-2s, the 1099 series, and the 94x series of forms. 

When it comes to the 94x series forms, many businesses are required to file Form 941 annually with the IRS. The deadline to do so is January 31, 2023. However, employers who have made timely FUTA deposits can file Form 940 on February 10, 2023.

To help you complete your required filing as quickly and easily as possible, we are bringing you the information you need about Form 940 and your FUTA taxes. This includes the credit reduction states that the IRS has drafted for the 2022 tax year. 

What is Form 940? 

Let’s start with a quick overview of this form! Form 940 is the Employer’s Annual Federal Unemployment (FUTA) Tax Return. The 940 is designed to report businesses’ Federal Unemployment Taxes, in accordance with the Federal Unemployment Tax Act (FUTA). 

The taxes collected are used by the government to fund unemployment compensation payments.

What businesses are required to file Form 940? 

Employers who meet either of the following criteria must file Form 940 and pay FUTA taxes:

Employers who paid $1,500 in wages to employees during the 2021 and 2022 tax years 

Businesses that employed workers (full-time, part-time, temporary) for any 20 weeks of the 2021 or 2022 tax years. 

According to the IRS, If you employ household workers, you must pay FUTA taxes on wages that you paid to your household employees only if you paid cash wages of $1,000 or more in any calendar quarter in 2021 or 2022.

Employers in the agriculture industry should file and pay FUTA taxes if they paid cash wages of $20,000 or more during any quarter of the previous or current tax year or employed 10 or more farmworkers during the same time period. 

What is a Credit Reduction State? 

If a state has an outstanding unemployment benefits loan from the federal government, it is considered a credit reduction state. Businesses that must pay unemployment taxes to this state will pay a reduced rate until the state has repaid its balance to the IRS. 

Which States are subject to Credit Reduction for 2022?

The Department of Labor determines the states that are subject to credit reduction based on their debt. For the 2022 tax year, the IRS has released the Form 940 Schedule A. This schedule is used to report information about multi-state employers and those that hire employees within a credit reduction state.

According to this draft, the following states are facing credit reduction status with a rate of .3%. 

  • California, 
  • Connecticut, 
  • Illinois, and 
  • New York 

The U.S. Virgin Islands will face a rate of 3.6% for 2022. 

Remember, if you employ workers who live in different states, you should complete Form 940, Schedule A. You should also attach Schedule A if you are operating in a credit reduction state. Click here to learn more about Schedule A. 

Filing Form 940 may seem complicated, but with TaxBandits, it is simple! Our filing process is quick and easy to follow. Plus, our excellent U.S based support team is available to answer your questions via phone, email, or live chat. 

Ready to get started on your year-end filing? Create your free TaxBandits account today!

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