The U.S. Department of Labor recently announced that California, New York, and the U.S. Virgin Islands are designated as credit reduction states for the 2024 tax year. This means that employers in these jurisdictions will face higher federal unemployment tax (FUTA) rates due to outstanding unemployment loans.
Let’s take a closer look at what all this means, why it’s happening, and how it impacts you as an employer.
The FUTA Tax and Its Purpose
The Federal Unemployment Tax Act (FUTA) funds state workforce agencies that provide unemployment benefits. In most cases, employers pay FUTA taxes annually, by filing Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return).
However, if an employer reaches a liability threshold of $500 or more in a particular quarter, they must make their deposit at the end of that quarter.
- Standard FUTA Rate: The FUTA tax rate is 6.0% on the first $7,000 of wages for each employee per year.
- FUTA Credit: Employers who pay state unemployment taxes promptly receive a credit of 5.4%, which lowers an employer’s FUTA tax rate to 0.6%.
However, suppose states borrow money for their unemployment accounts and fail to pay off these loans within a certain period. In that case, employers lose a portion of this credit, and this is usually referred to as a credit reduction.
What is a Credit Reduction State?
Under Title XII of the Social Security Act, states may borrow from the federal government to cover unemployment benefits when their funds are depleted. When a state fails to repay these advances within a specified period, employers lose part of their FUTA tax credit.
For 2024, California, New York, and the U.S. Virgin Islands are subject to credit reductions. Connecticut, another state that faced potential reduction, repaid its debt in time to avoid the penalty.
How Credit Reductions Impact Employers
When a state has outstanding unemployment loans:
- The FUTA credit is reduced by 0.3% for each consecutive year the debt remains unpaid.
- Employers in California and New York will face a 0.9% reduction in their FUTA credit this year, resulting in an effective rate of 1.5%.
- The U.S. Virgin Islands, with an outstanding debt dating back to 2010, faces a 4.2% reduction, raising its effective FUTA tax rate to 4.8% for 2024.
FUTA Credit Reduction Schedule for 2024
| State | Credit Reduction | Effective FUTA Rate |
| California | 0.9% | 1.5% |
| New York | 0.9% | 1.5% |
| U.S. Virgin Islands | 4.2% | 4.8% |
How to Prepare for Credit Reductions
Employers in affected states should expect increased FUTA tax obligations:
- Form 940 Schedule A: The IRS will release the 2024 Schedule A (Form 940), which employers must complete to report multi-state and credit reduction information.
- Due Date: The additional FUTA tax is due with Form 940, filed by January 31, 2025.
Employers in credit reduction states should budget for these additional taxes and ensure timely filing to avoid penalties.
How Computer Payroll Can Help
Navigating FUTA credit reductions and other tax adjustments can be complex, but payroll software simplifies the process. With automated updates and accurate calculations, payroll software ensures compliance by retroactively adjusting unemployment taxes, minimizing manual effort, and reducing the risk of errors.
By leveraging payroll software, employers can focus on running their businesses while staying on top of changing tax regulations seamlessly.
Staying Informed and Compliant
Credit reduction states may change annually, depending on each state’s repayment progress. Employers in California, New York, and the U.S. Virgin Islands should stay current with state and federal requirements to ensure accurate tax planning. For more information on FUTA credit reductions, visit the IRS FUTA Credit Reduction page.
We are dedicated to helping you navigate these adjustments. Please reach out if you have any questions about these changes or need assistance with payroll tax compliance.
