FUTA (Federal Unemployment Tax Act)

With few exceptions, FUTA taxes are not withheld from an employee's wages; they are paid only by employers into federal and state unemployment programs. For 2024, the three exceptions are: Alaska, New Jersey and Pennsylvania. Employers in theses states withhold the appropriate amounts from their employees' wages and remit the funds to the state.

FUTA Taxes

Gross wages up to $7,000 paid to each employee for a calendar year are subject to FUTA taxes. For example, if you have two employees and paid one gross wages of $15,000 and the other gross wages of $10,000 ($25,000 total gross wages), the total FUTA wages subject to FUTA tax would be $14,000 ($7,000 plus $7,000).

FUTA Tax Rate and Credits

For 2024, the FUTA tax rate is 6.0% (.06). However, if an employer pays their state unemployment insurance on time and in full, the employer can receive a credit of up to 5.4% (.054), thereby reducing this tax as low as 0.6% (.006), up to a 90% reduction. However, so-called credit reduction states can have the 5.4% credit reduced.

Credit Reduction States

A credit reduction state is a state that has taken a loan from the federal government to meet its state unemployment benefits liabilities and has not repaid the loan within the allowable time frame.

For 2024, California, New York and the U.S. Virgin Islands are credit reduction states.

California credit reduction rate: 0.9% (0.009)
New York credit reduction rate: 0.9% (0.009)
U.S. VI credit reduction rate: 4.2% (0.042)

If you are in one of these states, your FUTA credit for state unemployment taxes is reduced on Schedule H. Credit reduction states are listed on Schedule A of Form 940 and in Schedule H instructions..

Computing the Credit Reduction:

If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, that employer must pay additional federal unemployment tax as a result of having its regular FUTA 6.0% rate reduced. Form 940 is used to file FUTA tax.

The additional FUTA tax is computed by reducing the standard 5.4% credit by the credit reduction rate for your state.

Example:

You're an employer in a credit reduction state.
The regular FUTA tax rate before any credit reduction is 6.0%.
The standard FUTA tax credit before any credit reduction is 5.4%.
Your state's credit reduction rate is 0.3% (.003).
Your reduced FUTA tax credit is 5.1% (5.4% minus 0.3%)

Your effective FUTA tax rate is 0.9% (6.0% minus 5.1%), an additional 0.3% tax.

Additional Credit

You may receive an additional credit if you have a state experience rate lower than 5.4% (0.054). This applies even if your rate varies during the year. This additional credit is the difference between your actual state unemployment tax payments and the amount you would have been required to pay at 5.4%.

Special Credit for Successor Employers