FUTA Credit Reductions

Current FUTA Rate

The current FUTA tax rate of 6.0% is applied to the federal wage base, the first $7,000 paid to each employee during the year. Employers generally receive a 5.4% credit for state unemployment taxes when they file their Form 940, which results in a 0.6% net FUTA tax rate, or $42.00 per employee. The following states are eligible for a reduction:

N/A indicates the 2.7 add-on and/or BCR add-on are not applicable to the state.

(1) Each of these states and territories has passed at least two consecutive January 1st’s with an outstanding Federal advance, and employers in these States are therefore subject to a potential FUTA credit reduction.

(2) For each consecutive January 1 a state or territory passes with an outstanding advance, following the second one, employers in the state are subject to an additional 0.3% reduction in their FUTA credit.

(3) Following their third consecutive January 1 with an outstanding advance, states are subject to an additional FUTA credit reduction called the 2.7 add-on. A description of this add-on is in FUTA 3302(c)(2)(B). This value is based on wages and tax contributions for the calendar year of 2023.

(4) The Virgin Islands is also potentially subject to the Benefit Cost Rate (BCR) additional credit reduction formula for having passed at least five consecutive January 1s with an outstanding Federal advance – FUTA section 3302 (c) (2). This value is based on wages and tax contributions for the calendar year of 2023.

(5) The potential FUTA credit reduction for 2024 is calculated by adding the credit reduction due to having an outstanding advance plus the reduction from the 2.7% add-on or the BCR add-on if applicable, which can be waived and replaced by the 2.7% add-on per FUTA section 3302(c)(2)(C).

What is FUTA?

FUTA is the Federal Unemployment Tax, which provides for unemployment compensation payments to workers who have lost their jobs. Employers pay this tax, which is not withheld from employees’ wages.

The Department of Labor (DOL) releases a list of states each year subject to a reduction in FUTA credit. A state that has not repaid the money borrowed from the federal government to pay its unemployment benefits constitutes a credit reduction state. These states are subject to a reduction in the credit for unemployment taxes that can be applied to the overall federal unemployment tax credit on the IRS Form 940.

This additional FUTA tax, resulting from the credit reduction, escalates annually until the loans are repaid. The offset generally applies to all employers except government entities, non-profit organizations, and Native American tribes. The FUTA tax liability is not due or reportable until January 31 of the following year, the filing date for the 2024 Form 940.

How FUTA Impacts States

Every year, the Department of Labor (DOL) releases a list of states subject to a reduction in FUTA credit. A state that has not repaid the money it borrowed from the federal government to pay its unemployment benefits constitutes a credit reduction state.

The states subject to a reduction in the credit for unemployment taxes can apply the overall federal unemployment tax credit on the IRS Form 940. This additional FUTA tax, resulting from the credit reduction, escalates annually until the loans are repaid.

How This Affects Your Company

This offset generally applies to all employers, except government entities, nonprofit organizations, and Native American tribes. The FUTA tax liability is not due or reportable until January 31 of the following year.

If your company is not exempt, you may have to pay more FUTA taxes on wages subject to the unemployment tax laws. For example, a 10-employee company subject to a 0.9% reduction, in which each employee makes a minimum of $7,000, will pay an additional $630.00 or $63.00 per employee.

How APS Can Help

Here’s how APS’ system helps make FUTA management easier: