What is the FUTA Credit Reduction?
Sometimes a state takes loans from the Federal Unemployment Trust Fund if it lacks the funds to pay unemployment insurance benefits for its residents. If a state has outstanding loan balances for two consecutive years, the FUTA credit rate for employers in that state will be reduced by 0.3% for each year in arrears until the loan is repaid. This ultimately requires employers to pay additional unemployment tax when filing Form 940 for 2019, which will be due by January 31, 2020.
How is the FUTA Credit Reduction Calculated?
The standard FUTA tax rate is 6.0% on the first $7,000 of wages subject to FUTA. However, employers generally receive a credit of 5.4% for state unemployment taxes when they file their Form 940. This results in a net FUTA tax rate of 0.6% (6.0% - 5.4% = 0.6%), which equates to a maximum FUTA tax of $42.00 per employee, per year.
However, the result of being an employer in a credit reduction state is a higher tax due on Form 940. FUTA credit reduction states will see a decrease in the standard 5.4% credit, which will retroactively increase their FUTA taxes from January 1st, 2019.
For example, an employer in a state with a credit reduction of 2.1% would compute its FUTA tax by reducing the 6.0% FUTA tax rate by a FUTA credit of only 3.3% (the standard 5.4% credit minus the 2.1% credit reduction) for an effective FUTA tax rate of 2.7% for the year.
Credit Reduction By State
As of November 10, 2019, only the Virgin Islands had a remaining balance and therefore is subject to a higher rate. The previous 5 years can be seen below. More information on the FUTA Credit Reduction can be found on the 940 Schedule A or the IRS Website.
*OnPay does not file or pay taxes for the Virgin Islands.