FAQ: 2023 FUTA Credit Reduction Adjustments

IRS NOTICE

These states have an adjusted FUTA tax credit of 4.8% for 2023

These states did not repay all their advances before November 10, 2023, resulting in a 0.6% credit reduction for employers. 

California

New York

A credit reduction cannot be pre-determined, as it is based on two historical factors:

• The year-to-date tax amount that employers paid towards state unemployment in every state where their employees worked for the past year; plus
• How much the federal government loaned the state itself for unemployment benefit liabilities

The FUTA (Federal Unemployment Tax Act) tax is levied by the IRS, and applies to employers covered by a state’s UI program. The standard FUTA tax rate is 6.0% on the first $7,000 of any taxable wages paid to any employee, but the FUTA Tax Credit can lower this rate by 5.4% for employers who make all payments in-full and on-time, bringing the effective rate down to 0.6%.

States may take loans from the US government called Federal Unemployment Trust Fund loans in order to cover the cost of unemployment insurance benefits for residents of their states. But if the borrowing state doesn't repay these loans for multiple consecutive years, the IRS will reduce the allowable FUTA Tax Credit rate for employers in that state by 0.3% each year until the loan is repaid.

California, Connecticut, Illinois, and New York all had overdue unemployment insurance loans which impacted the FUTA tax credit for employers operating in these states. This means employers in these states had higher payroll costs for 2022 as the new FUTA tax credit rate is reduced by 0.3%, lowering it from 5.4% to 5.1%, for an effective FUTA tax rate is 0.9% (up 0.3% from the standard rate of 0.6%). 

Of the four states listed above, California and New York did not repay all their advances before November 10, 2023, resulting in a 0.6% credit reduction for employers in these states.

Learn more about the FUTA credit reduction at IRS.gov→

This additional liability is calculated through multiplying the total wages subject to federal unemployment (up to the max of $7,000 per employee) by the credit reduction (0.6%).

Schedule A in Filings

In the Filings menu, this amount is found in Schedule A (Form 940):

 

The adjustment amount owed is listed under the Credit Reduction column for any or all of the 4 states affected (CA, CT, IL, NY) in which you may have had employees throughout 2022. 

 

Employee taxable wages

The simplest way to view employee taxable wages, especially if you have employees that work in multiple states, is the state’s quarterly unemployment returns found in the Filings menu. 

 

Since the FUTA Credit Reduction is only calculated on wages that were also taxed for state unemployment, using the state returns might make finding the information easier as these reports display each employee’s quarterly taxable wages. Keep in mind, regardless of the state’s unemployment taxable wage base, the FUTA Credit Reduction only applies to the first $7,000 paid to the employee in 2022.

 

Using the California Quarterly Contribution Return for Quarter 1 of 2022 as an example, we see the total UI Taxable Wages for all employees this quarter is $14,000. 

Further down the return, we can see each employee’s state subject wages in the quarter. Briana has $17,500 in subject wages and Shelley has $21,183.04 in subject wages. Since the FUTA Credit Reduction only applies to first $7,000, we know each employee has met this limit as of Q1 of 2022.