FUTA Credit Reductions

Here are the most recent Federal Unemployment Tax Assessment updates so you can maintain compliance. 

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:

2020 FUTA credit reduction states and amounts

Updated: 11/10/2020

Virgin Islands: 3.0% FUTA Credit Reduction 

EMPLOYERS IN THE US VIRGIN ISLANDS

The Virgin Islands had a Title XII advance balance on January 1, 2020, so employers in this jurisdiction are potentially subject to a reduction in FUTA. The Virgin Islands did not repay all advances prior to November 10, 2020. Therefore, employers in the Virgin Islands are subject to a FUTA credit reduction of 3.0% in 2020.

The Virgin Islands has passed at least two consecutive January 1’s with an outstanding Federal advance and are therefore subject to a potential FUTA credit reduction. FUTA sections 3302(c)(2) and 3302(d)(3) provide that employers in states that have an outstanding balance of advances under Title XII of the Social Security Act at the beginning of January 1 of two or more consecutive years are subject to a reduction in credits otherwise available against the FUTA tax if all advances are not repaid before November 10 of the taxable year. These credit reductions are made from the regular credit of 5.4%. So, while employers in states without a credit reduction will have a FUTA tax rate of 0.6% (on the first $7,000 of wages paid) for the year, employers in states with a credit reduction due to an outstanding balance of advances will incur a FUTA tax rate of 0.6% + the FUTA credit reduction.

For each January 1st a state 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.

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. This value is based on estimated wages and tax contributions for the calendar year of 2020.

The Virgin Islands is also potentially subject to the Benefit Cost Rate (BCR) additional credit reduction formula for having passed five consecutive January 1sts with an outstanding Federal advance as detailed in FUTA section 3302(c)(2). This value is based on wages and tax contributions for the calendar year of 2019.

(A state may apply for relief from a reduction in its FUTA credit under section FUTA 3302. The deadline for application of relief for all types was July 1, 2020. The Virgin Islands applied for, and was found eligible for, a waiver of the “BCR add-on” credit reduction.

The Final FUTA credit reduction for 2020 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, which can be waived, and applying this to Virgin Islands which has an outstanding advance Title XII on Nov. 10, 2020.

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 April 30, 2021 the filing date for the 2020 Form 940.

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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, non-profit organizations, and Native American tribes. The FUTA tax liability is not due or reportable until April 30, 2021. 

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

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

  • 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.
FUTA Information

The information on this page is subject to change at any time based on tax regulation updates. To stay current on payroll processing issues and payroll tax news, subscribe to the APS Blog.

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