There are 20 states and one territory (Virgin Islands) that have FUTA credit reductions imposed for 2011 unemployment taxes. The 20 states are: Arkansas, California, Connecticut, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Virginia, and Wisconsin. The credit reduction will increase the 2011 Federal Unemployment rate by 0.3% except in Indiana, where the increase will be 0.6%, and Michigan, where the increase will be 0.9%.
Employers in “credit reduction” states must remember to calculate a credit reduction as an adjustment to their FUTA tax on their 2011 Form 940 (PDF), Employer’s Annual Federal Unemployment (FUTA) Tax Return. “Credit reduction” states are states that did not repay the money they borrowed from the federal government to pay unemployment benefits.
The Department of Labor determines the credit reduction states for each year. For 2011, employers in these states must reduce their .054 credit on their Form 940 by the following amounts:
Employers in these states must use the Schedule A (Form 940) (PDF) to compute the credit reduction and attach the Schedule A to their Form 940. More information on the credit reduction, including an example on how to calculate the credit reduction is on the Schedule A (Form 940) and also in the Instructions for Form 940 (PDF).
As a result, if employers pay wages that are subject to the unemployment tax laws of a credit reduction state, the employers must pay additional FUTA tax. Employers must include liabilities owed for credit reduction in calculating their fourth quarter deposit.
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