FUTA Credit Reductions
Current FUTA Rate
Potential 2024 FUTA Credit Reduction States and Amounts
Updated: 9/13/24
State¹ | 2024 Potential Credit Reduction² | 2024 Potential “2.7 Add-On”³ | 2024 Estimated “BCR Add-On”⁴ | 2024 Potential Total Credit Reduction⁵ |
|---|---|---|---|---|
California | 0.9% | 0.0% | N/A | 0.9% |
Connecticut | 0.9% | 0.0% | N/A | 0.9% |
New York | 0.9% | 0.0% | N/A | 0.9% |
Virgin Islands | 4.2% | 0.0% | 0.9% | 5.1% |
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 have passed at least two consecutive January 1’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) Virgin Islands is also potentially subject to the Benefit Cost Rate (BCR) additional credit reduction formula for having passed at least five consecutive January 1’s 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 payments of unemployment compensation to workers who have lost their jobs. This tax is paid by employers and 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 it borrowed from the federal government to pay their 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 taxes 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 who are subject to a reduction in FUTA credit. A state that has not repaid the money it borrowed from the federal government to pay their unemployment benefits constitutes a credit reduction state.
The states that are subject to a reduction in the credit for unemployment taxes can apply the overall federal unemployment taxes 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, with the exceptions of 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 then you may have to pay more FUTA taxes on wages paid that are 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
- Our tax compliance experts handle all of the paperwork and filings for payroll taxes to keep you compliant.
- State-level system updates of credit reduction rates
- Notifies you when your state has a FUTA credit reduction and what amount is due the first week of January
- Preparation and filing of Form 940
Federal Unemployment Tax Act FAQs
Here is an overview of users’ most frequently asked questions about the federal unemployment tax act.
The Federal Unemployment Tax, or FUTA, which provides for payments of unemployment compensation to workers who have lost their jobs. Employers pay this tax and it is not withheld from employees’ wages.
If employers paid wages subject to state unemployment tax, they may receive a credit of up to 5.4% of FUTA taxable wages when filing Form 940. If an employer is entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.6%.
Under federal law, any business with employees is subject to the FUTA payroll tax. Employers then file a form 940 employer annual federal unemployment FUTA tax return each year based on the amount of FUTA tax paid. Employers file using their 9-digit employer identification number used to file their federal tax return.
According to the IRS, organizations that are exempt from income under section 501(c)(3) of the Internal Revenue Code are also exempt from the unemployment tax act (FUTA).
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