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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:

2018 FUTA credit reduction states and amounts
Updated: 11/15/18
US Virgin Islands: 2.4% FUTA credit reduction

EMPLOYERS IN THE US VIRGIN ISLANDS

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.

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 January 31, 2020, the filing date for the 2019 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 January 31, 2017, the filing date for the 2016 Form 940.

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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