Employers pay a variety of federal, state, and local taxes. One of these taxes is Federal Unemployment Tax – more commonly referred to in payroll parlance as “FUTA.”
All employers must pay FUTA, which funds the Federal Unemployment Trust Fund administered by the Department of Labor (DOL). The FUTA tax rate is 6%, and employers can usually receive a FUTA tax credit of 5.4%. Employers in some states may owe more tax due to what’s known as a FUTA tax credit reduction.
This article will provide some background on FUTA and the FUTA tax credit, and then review which states are considered FUTA tax credit reduction states in 2024.
What is the FUTA tax?
Under the Federal Unemployment Insurance Tax Act (FUTA), the federal government levies a tax on employers covered by a state’s unemployment insurance program to fund the Federal Unemployment Trust Fund administered by DOL.
The fund is used to supplement the cost of extended unemployment benefits during times of high unemployment. It also serves as a loan resource which states may borrow from to pay unemployment insurance benefits to their residents. The FUTA tax covers the administration costs for all unemployment insurance and job service programs in all states.
The standard FUTA tax rate levied on employers is 6% applied to the first $7,000.00 in wages paid by the employer to the employee (FUTA wage base). However, employers may receive a FUTA tax credit of 5.4% when they file their annual Form 940 Return if they pay their state unemployment taxes in full, on time, and the state is not determined to be a credit reduction state.
What is a FUTA credit reduction?
Depending on which state you operate in, you may end up with a higher FUTA tax.
This is because some states have outstanding balances on loans taken from the Federal Unemployment Trust Fund. If that’s the case, the 5.4% FUTA tax credit employers typically enjoy is reduced.
Specifically, if states have outstanding loan balances on January 1 for two consecutive years, and do not pay the full balance by November 10 of the second year, then the FUTA tax credit is reduced until the loan is repaid in full. This results in a higher tax due from the employer on its annual Form 940 return.
Which states/jurisdictions have a FUTA credit reduction in 2024?
California, New York, and the US Virgin Islands have a FUTA credit reduction for 2024.
Employers in California and New York will be subject to a 0.6% credit reduction. This means employers in those states will pay an effective FUTA tax rate of 1.2%.
Employers in the US Virgin Islands will be subject to a 3.6% credit reduction. This means employers in that jurisdiction will pay an effective FUTA tax rate of 4.2%.
Employers in California, New York, and the US Virgin Islands should plan accordingly for the higher FUTA tax liability for 2023. Remember, increased FUTA tax liability is assessed in Quarter Four and due by January 31 of the following year.
What is the amount of the FUTA credit reduction?
The amount the credit is reduced is .3% per year, for each year the loan remains unpaid.
Additional resources for employers subject to the FUTA tax credit reduction can be found on the IRS website as well as the U.S. Department of Labor website.
Disclaimer: The information contained herein is not intended to be construed as legal advice, nor should it be relied on as such. Employers should closely monitor the rules and regulations specific to their jurisdiction(s) and should seek advice from counsel relative to their rights and responsibilities.