Title 26, Internal Revenue CodeRelease 119-110
§3303 Conditions of Additional Credit Allowance
Title 26 › Subtitle C — Employment Taxes › CHAPTER 23 — FEDERAL UNEMPLOYMENT TAX ACT › § 3303
Summary
Allows a taxpayer to get an extra federal credit for state unemployment taxes only if the U.S. Secretary of Labor finds the state’s rules meet certain safety checks. The rules must let lower tax rates for pooled or partially pooled funds only when they are based on the employer’s unemployment experience or other direct risk factors over at least 3 consecutive years before the rate is figured. For a guaranteed employment account, the guarantee must have been met in the year before the rate date, the account balance must be at least 2½% of the payroll used to measure contributions for the prior 3 years, and contributions must have been paid into it for those 3 years. For a reserve account, the account must have paid benefits during the year before the rate date, must have a balance at least five times the largest annual payout in the prior 3 years, must have at least 2½% of the 3-year payroll, and must have had contributions for 3 years. Certified professional employer organizations may collect and pay these contributions under the same rules. If an employer hasn’t been under the law for 3 years, the state can use a shorter period (but at least 1 year) or allow a reduced rate no less than 1% on a reasonable basis. Each year on October 31 the Secretary of Labor tells the Treasury which state laws met these checks for the past 12 months. The Secretary must also tell a state within 30 days after the state asks for a decision. Key terms: reserve account (separate employer account that pays only that employer’s benefits), pooled fund (merged contributions for many employers), partially pooled account (mix of pooled and employer-specific use), guaranteed employment account (employer promises set hours—e.g., at least 30 hours for 40 weeks—and backs that promise), year (12 months), balance (amount in the account on the computation date), computation date (date used to figure rates, at least once a year and within 27 weeks before new rates), and reduced rate (a rate lower than the state’s standard). States may allow voluntary payments if made within 120 days after the year starts, let certain 501(c)(3) nonprofits pay amounts equal to compensation instead of contributions, and must not remove charges from an employer’s account when the employer repeatedly fails to respond to agency requests.
Full Legal Text
Title 26, §3303
Internal Revenue Code, Source: USLM XML via OLRC
(a)State standards
A taxpayer shall be allowed an additional credit under section 3302(b) with respect to any reduced rate of contributions permitted by a State law, only if the Secretary of Labor finds that under such law—
(1)no reduced rate of contributions to a pooled fund or to a partially pooled account is permitted to a person (or group of persons) having individuals in his (or their) employ except on the basis of his (or their) experience with respect to unemployment or other factors bearing a direct relation to unemployment risk during not less than the 3 consecutive years immediately preceding the computation date;
(2)no reduced rate of contributions to a guaranteed employment account is permitted to a person (or a group of persons) having individuals in his (or their) employ unless—
(A)the guaranty of remuneration was fulfilled in the year preceding the computation date; and
(B)the balance of such account amounts to not less than 2½ percent of that part of the payroll or payrolls for the 3 years preceding the computation date by which contributions to such account were measured; and
(C)such contributions were payable to such account with respect to 3 years preceding the computation date;
(3)no reduced rate of contributions to a reserve account is permitted to a person (or group of persons) having individuals in his (or their) employ unless—
(A)compensation has been payable from such account throughout the year preceding the computation date, and
(B)the balance of such account amounts to not less than five times the largest amount of compensation paid from such account within any 1 of the 3 years preceding such date, and
(C)the balance of such account amounts to not less than 2½ percent of that part of the payroll or payrolls for the 3 years preceding such date by which contributions to such account were measured, and
(D)such contributions were payable to such account with respect to the 3 years preceding the computation date; and
(4)if the taxpayer is a certified professional employer organization (as defined in section 7705) that is treated as the employer under section 3511, such certified professional employer organization is permitted to collect and remit, in accordance with paragraphs (1), (2), and (3), contributions during the taxable year to the State unemployment fund with respect to a work site employee.
For any person (or group of persons) who has (or have) not been subject to the State law for a period of time sufficient to compute the reduced rates permitted by paragraphs (1), (2), (3), and (4) of this subsection on a 3–year basis (i) the period of time required may be reduced to the amount of time the person (or group of persons) has (or have) had experience under or has (or have) been subject to the State law, whichever is appropriate, but in no case less than 1 year immediately preceding the computation date, or (ii) a reduced rate (not less than 1 percent) may be permitted by the State law on a reasonable basis other than as permitted by paragraph (1), (2), (3), or (4).
(b)Certification by the Secretary of Labor with respect to additional credit allowance
(1)On October 31 of each calendar year, the Secretary of Labor shall certify to the Secretary of the Treasury the law of each State (certified by the Secretary of Labor as provided in section 3304 for the 12-month period ending on such October 31), with respect to which he finds that reduced rates of contributions were allowable with respect to such 12-month period only in accordance with the provisions of subsection (a).
(2)If the Secretary of Labor finds that under the law of a single State (certified by the Secretary of Labor as provided in section 3304) more than one type of fund or account is maintained, and reduced rates of contributions to more than one type of fund or account were allowable with respect to any 12-month period ending on October 31, and one or more of such reduced rates were allowable under conditions not fulfilling the requirements of subsection (a), the Secretary of Labor shall, on such October 31, certify to the Secretary of the Treasury only those provisions of the State law pursuant to which reduced rates of contributions were allowable with respect to such 12-month period under conditions fulfilling the requirements of subsection (a), and shall, in connection therewith, designate the kind of fund or account, as defined in subsection (c), established by the provisions so certified. If the Secretary of Labor finds that a part of any reduced rate of contributions payable under such law or under such provisions is required to be paid into one fund or account and a part into another fund or account, the Secretary of Labor shall make such certification pursuant to this paragraph as he finds will assure the allowance of additional credits only with respect to that part of the reduced rate of contributions which is allowed under provisions which do fulfill the requirements of subsection (a).
(3)The Secretary of Labor shall, within 30 days after any State law is submitted to him for such purpose, certify to the State agency his findings with respect to reduced rates of contributions to a type of fund or account, as defined in subsection (c), which are allowable under such State law only in accordance with the provisions of subsection (a). After making such findings, the Secretary of Labor shall not withhold his certification to the Secretary of the Treasury of such State law, or of the provisions thereof with respect to which such findings were made, for any 12-month period ending on October 31 pursuant to paragraph (1) or (2) unless, after reasonable notice and opportunity for hearing to the State agency, the Secretary of Labor finds the State law no longer contains the provisions specified in subsection (a) or the State has, with respect to such 12-month period, failed to comply substantially with any such provision.
(c)Definitions
As used in this section
(1) Reserve account
(2)Pooled fund
The term “pooled fund” means an unemployment fund or any part thereof (other than a reserve account or a guaranteed employment account) into which the total contributions of persons contributing thereto are payable, in which all contributions are mingled and undivided, and from which compensation is payable to all individuals eligible for compensation from such fund.
(3)Partially pooled account
The term “partially pooled account” means a part of an unemployment fund in which part of the fund all contributions thereto are mingled and undivided, and from which part of the fund compensation is payable only to individuals to whom compensation would be payable from a reserve account or from a guaranteed employment account but for the exhaustion or termination of such reserve account or of such guaranteed employment account. Payments from a reserve account or guaranteed employment account into a partially pooled account shall not be construed to be inconsistent with the provisions of paragraph (1) or (4).
(4)Guaranteed employment account
The term “guaranteed employment account” means a separate account, in an unemployment fund, maintained with respect to a person (or group of persons) having individuals in his (or their) employ who, in accordance with the provisions of the State law or of a plan thereunder approved by the State agency,
(A)guarantees in advance at least 30 hours of work, for which remuneration will be paid at not less than stated rates, for each of 40 weeks (or if more, 1 weekly hour may be deducted for each added week guaranteed) in a year, to all the individuals who are in his (or their) employ in, and who continue to be available for suitable work in, one or more distinct establishments, except that any such individual’s guaranty may commence after a probationary period (included within the 11 or less consecutive weeks immediately following the first week in which the individual renders services), and
(B)gives security or assurance, satisfactory to the State agency, for the fulfillment of such guaranties, from which account, unless such account is exhausted or terminated, is paid all and only compensation, payable on the basis of services performed for such person (or for one or more of the persons comprising the group), to any such individual whose guaranteed remuneration has not been paid (either pursuant to the guaranty or from the security or assurance provided for the fulfillment of the guaranty), or whose guaranty is not renewed and who is otherwise eligible for compensation under the State law.
(5)Year
The term “year” means any 12 consecutive calendar months.
(6)Balance
The term “balance”, with respect to a reserve account or a guaranteed employment account, means the amount standing to the credit of the account as of the computation date; except that, if subsequent to January 1, 1940, any moneys have been paid into or credited to such account other than payments thereto by persons having individuals in their employ, such term shall mean the amount in such account as of the computation date less the total of such other moneys paid into or credited to such account subsequent to January 1, 1940.
(7)Computation date
The term “computation date” means the date, occurring at least once in each calendar year and within 27 weeks prior to the effective date of new rates of contributions, as of which such rates are computed.
(8)Reduced rate
The term “reduced rate” means a rate of contributions lower than the standard rate applicable under the State law, and the term “standard rate” means the rate on the basis of which variations therefrom are computed.
(d)Voluntary contributions
A State law may, without being deemed to violate the standards set forth in subsection (a), permit voluntary contributions to be used in the computation of reduced rates if such contributions are paid prior to the expiration of 120 days after the beginning of the year for which such rates are effective.
(e)Payments by certain nonprofit organizations
A State may, without being deemed to violate the standards set forth in subsection (a), permit an organization (or a group of organizations) described in section 501(c)(3) which is exempt from income tax under section 501(a) to elect (in lieu of paying contributions) to pay into the State unemployment fund amounts equal to the amounts of compensation attributable under the State law to service performed in the employ of such organization (or group).
(f)Prohibition on noncharging due to employer fault
(1)In general
A State law shall be treated as meeting the requirements of subsection (a)(1) only if such law provides that an employer’s account shall not be relieved of charges relating to a payment from the State unemployment fund if the State agency determines that—
(A)the payment was made because the employer, or an agent of the employer, was at fault for failing to respond timely or adequately to the request of the agency for information relating to the claim for compensation; and
(B)the employer or agent has established a pattern of failing to respond timely or adequately to such requests.
(2)State authority to impose stricter standards
Nothing in paragraph (1) shall limit the authority of a State to provide that an employer’s account not be relieved of charges relating to a payment from the State unemployment fund for reasons other than the reasons described in subparagraphs (A) and (B) of such paragraph, such as after the first instance of a failure to respond timely or adequately to requests described in paragraph (1)(A).
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2014—Subsec. (a). Pub. L. 113–295, § 206(c)(2)(B), substituted “paragraphs (1), (2), (3), and (4)” for “paragraphs (1), (2), and (3)” and “paragraph (1), (2), (3), or (4)” for “paragraph (1), (2), or (3)” in concluding provisions. Subsec. (a)(4). Pub. L. 113–295, § 206(c)(2)(A), added par. (4). 2011—Subsecs. (f), (g). Pub. L. 112–40 added subsec. (f) and struck out former subsecs. (f) and (g) which contained transitional provisions enacted by prior
Amendments
. 1976—Subsec. (b)(1) to (3). Pub. L. 94–455 substituted reference to Secretary of the Treasury for reference to Secretary and reference to 12–month period for reference to 12 or 10-month period, as the case may be, and struck out reference to (10-month period in the case of Oct. 31, 1972) following provisions relating to 12–month period ending Oct. 31. Subsec. (f). Pub. L. 94–566, § 122(b), substituted “which elects before April 1, 1972,” for “which elects, when such election first becomes available under the State law,”. Subsec. (g). Pub. L. 94–566, § 122(a), added subsec. (g). 1970—Subsec. (a). Pub. L. 91–373, § 122(a), added to provision following par. (3) the authorization for the allowance of a reduced rate by State law (but not less than 1 percent) on a reasonable basis other than as permitted by par. (1), (2), or (3). Subsec. (b). Pub. L. 91–373, § 142(c)–(e), changed the certification date referred to in pars. (1) to (3) from Dec. 31 to Oct. 31, with provision for a 10-month period in the case of Oct. 31, 1972, and, except for Oct. 31, 1972, provided for a 12-month period ending on Oct. 31 each year. Subsecs. (e), (f). Pub. L. 91–373, § 104(c), added subsecs. (e) and (f). 1954—Subsec. (a). Act Sept. 1, 1954, inserted sentence relating to reduced rates for new employers.
Statutory Notes and Related Subsidiaries
Effective Date
of 2014 AmendmentAmendment by Pub. L. 113–295 applicable with respect to wages for services performed on or after January 1 of the first calendar year beginning more than 12 months after Dec. 19, 2014, see section 206(g)(1) of Pub. L. 113–295, set out as a note under section 3302 of this title.
Effective Date
of 2011 Amendment Pub. L. 112–40, title II, § 252(b), Oct. 21, 2011, 125 Stat. 422, provided that: “(1) In general.—Except as provided in paragraph (2), the
Amendments
made by this section [amending this section] shall apply to erroneous payments established after the end of the 2-year period beginning on the date of the enactment of this Act [Oct. 21, 2011]. “(2) Authority.—A State may amend its State law to apply such
Amendments
to erroneous payments established prior to the end of the period described in paragraph (1).”
Effective Date
of 1976
Amendments
Pub. L. 94–566, title I, § 122(c), Oct. 20, 1976, 90 Stat. 2676, provided that: “The amendment made by subsection (a) [amending this section] shall take effect on the date of the enactment of this Act [Oct. 20, 1976]. The amendment made by subsection (b) [amending this section] shall take effect on January 1, 1970.” Amendment by section 1903(a)(13) of Pub. L. 94–455 applicable with respect to wages paid after Dec. 31, 1976, see section 1903(d) of Pub. L. 94–455, set out as a note under section 3101 of this title.
Effective Date
of 1970 AmendmentAmendment by section 104(c) of Pub. L. 91–373 [amending this section] to take effect Jan. 1, 1970, see section 104(d)(1) of Pub. L. 91–373, set out as a note under section 3304 of this title. Pub. L. 91–373, title I, § 122(b), Aug. 10, 1970, 84 Stat. 702, provided that: “The
Amendments
made by subsection (a) [amending this section] shall apply with respect to taxable years beginning after December 31, 1971.” Amendment by section 142(c)–(e) of Pub. L. 91–373 applicable with respect to taxable year 1972 and taxable years thereafter, see section 142(i) of Pub. L. 91–373, set out as a note under section 3302 of this title.
Effective Date
of 1954 AmendmentAct Sept. 1, 1954, ch. 1212, § 2, 68 Stat. 1130, provided that the amendment made by that section is effective after Dec. 31, 1954. Treatment of Certain Charitable Organizations Retroactively Determined To Be Described in section 501(c)(3) of This Title Pub. L. 98–21, title V, § 524, Apr. 20, 1983, 97 Stat. 149, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “If—“(1) an organization did not make an election to make payments (in lieu of contributions) as provided in section 3309(a)(2) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] before
April 1, 1972, because such organization, as of such date, was treated as an organization described in section 501(c)(4) of such Code, “(2) the Internal Revenue Service subsequently determined that such organization was described in section 501(c)(3) of such Code, and “(3) such organization made such an election before the earlier of—“(A) the date 18 months after such election was first available to it under the State law, or “(B)
January 1, 1984, then [former] section 3303(f) of such Code shall be applied with respect to such organization as if it did not contain the requirement that the election be made before
April 1, 1972, and by substituting ‘
January 1, 1982’ for ‘
January 1, 1969’.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 3303
Title 26, Internal Revenue Code
Last Updated
Sep 22, 2026
Release point: 119-110