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The U.S. Department of Labor (DOL) identified three states and one territory that will be subject to the FUTA credit reduction.
As you know, employers pay FUTA and State Unemployment Insurance (UI) on wages paid to their employees. The FUTA tax rate is currently 6.0%, with employers receiving an offsetting credit of 5.4% for payment of state UI taxes. Therefore, the effective FUTA tax rate is a net of 0.6%, which applies to wages paid up to a limit of $7,000.00 per worker, or the equivalent of $42.00 per employee, per year. However, when state unemployment funds are depleted, the state will draw from a designated federal loan account. If these loans are not repaid within two years, part of the 5.4% FUTA tax credit is incrementally reduced each year as a credit reduction. When this credit reduction applies, the FUTA tax rate increases by 0.3% per year. This increase is payable in January of the following calendar year with the Form 940 FUTA Tax return. This credit is further reduced each year by 0.3% until the federal loans are repaid.
Beyond the standard credit reduction, states with prolonged outstanding federal loans may also be subject to the Benefit Cost Rate (BCT) Add-On. This additional reduction is calculated based on the state’s average unemployment compensation outlays relative to its taxable wages, minus the state’s average unemployment tax rate. The BCR add-on aims to accelerate loan repayment and encourage states to maintain adequate unemployment reserves.
To read more about the BCR, click here:
https://www.congress.gov/crs-product/RS22954
What does this mean for you?
As of January 2025, the following states and territories have outstanding federal
unemployment loan balances and are subject to FUTA credit reductions:
- California: Employers face a potential credit reduction of 1.2% for 2025.
- New York: Employers face a potential credit reduction of 1.2% for 2025.
- Connecticut: Employers face a potential credit reduction of 1.2% for 2025.
- US Virgin Islands: Employers face a potential credit reduction of 4.5% for 2025.
This may seem like a small amount, but it can add up quickly, especially for larger employers that have many employees. In addition, some states also pass the cost of federal unemployment loan interest on to employers in the form of an assessment or surcharge.
States potentially subject to the BCR Add-On in 2025:
- California: Potential BCR add-on of 3.7%.
- New York: Potential BCR add-on of 1.1%.
- Connecticut: Potential BCR add-on of 0.8%.
The combined effect of the credit reduction and the BCR add-on increases the net FUTA tax rate for employers in the affected states. For Example, in California, the total FUTA tax rate for 2025 could be 4.9%, resulting in an additional tax of $301 per employee.
We recommend the following actions:
1. Stay Informed: Regularly monitor updates from your state’s labor department and the U.S. Department of Labor regarding loan repayments and potential tax implications.
2. Financial Planning: Adjust your budgeting and payroll process to account for the increased FUTA tax rates in 2025. When negotiating pricing with your customers, consider the additional cost to your business.
3. Consult Professionals: Engage with your industry professionals to ensure compliance and to explore strategies for mitigating the impact of these tax increases.
As always, we recommend speaking with your attorney, CPA, or industry professional for further guidance.
For more information, we recommend accessing the following link:
https://oui.doleta.gov/unemploy/futa_credit.asp
Contact Information
To speak with a representative from the U.S Department of Labor:
Call the Employment and Training Administration (ETA) Line: 1-877-US-2JOBS (1-877-872-5627)
If you have questions or desire further information, you may email representatives at the Division of Fiscal and Actuarial Services:
Kevin Stapleton Stapleton: Kevin@dol.gov
Dyana Cornell Cornell: Dyana@dol.gov