FUTA Credit Reductions

APS brings you the most recent updates on FUTA credit reductions by state.

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 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 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, 2017, the filing date for the 2016 Form 940.

For 2018, employers in the U.S. Virgin Islands are to be assessed a general FUTA credit reduction of 2.4 percent on wages paid to employees. The outstanding loan balances result in employers paying additional federal unemployment tax of up to $168 per employee beyond the standard FUTA cost of up to $42 per employee.

Additional amounts due for 2018 credit reductions are to be paid by January 31, 2019. Both jurisdictions applied for and received waivers from an additional benefit cost-rate reductions that could have applied.

How This Affects Your Company

If your company is not exempt then you may have to pay more FUTA tax 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

APS handles all payroll tax paperwork, filings, and payments for FUTA, keeping you in compliance:

  • State-level system update of credit reduction rates
  • Notification whether your state has a FUTA credit reduction and what amount is due the first week of January
  • Preparation and filing of Form 940
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