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:

2023 FUTA Credit Reduction
States and Amounts

Updated: 10/31/2023

Virgin Islands: 3.6% FUTA Credit Reduction

Employers in the U.S. Virgin Islands

The Virgin Islands had a Title XII advance balance on January 1, 2024, so employers in this jurisdiction are potentially subject to a reduction in FUTA. The Virgin Islands did not repay all advances prior to November 10, 2023. Therefore, employers in the Virgin Islands are subject to a FUTA credit reduction of 3.6% for 2023.
The Virgin Islands has been subject to a FUTA credit reduction in past years because of an outstanding Federal advance and are therefore subject to a potential FUTA credit reduction. FUTA sections 3302(c)(2) and 3302(d)(3) provide that employers in states that have an outstanding balance of advances under Title XII of the Social Security Act at the beginning of January 1 of two or more consecutive years are subject to a reduction in credits otherwise available against the FUTA tax if all advances are not repaid before November 10 of the taxable year.
These credit reductions are made from the regular credit of 5.4%. So, while employers in states without a credit reduction will have a FUTA tax rate of 0.6% (on the first $7,000 of wages paid) for the year, employers in states with a credit reduction due to an outstanding balance of advances will incur a FUTA tax rate of 0.6% + the FUTA credit reduction.
For each consecutive January 1st that a state or territory passes with an outstanding advance, following the second one, employers in the state are subject to an additional 0.3% reduction in their FUTA credit.
Following their third consecutive January 1 with an outstanding advance, states are subject to an additional FUTA credit reduction called the 2.7 add-on. This value is based on estimated wages and tax contributions for the third and fourth quarters of 2023.
The Virgin Islands is also potentially subject to the Benefit Cost Rate (BCR) additional credit reduction formula for having passed five consecutive January 1sts with an outstanding Federal advance as detailed in FUTA section 3302(c)(2). This value is a preliminary estimate based on wages and tax contributions for the third and fourth quarters of 2023.
The potential FUTA credit reduction for 2023 is calculated by adding the credit reduction due to having an outstanding advance plus the reduction from the 2.7% add-on or the BCR add-on if applicable, which can be waived and replaced by the 2.7 add-on, FUTA section 3302(c)(23)(C).
The Final FUTA credit reduction for 2023 is calculated by adding the credit reduction due to having an outstanding advance plus the reduction from the 2.7% add-on or the BCR add-on, which can be waived, and applying this to the Virgin Islands which has an outstanding advance Title XII on Nov. 10, 2023.

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 of the following year, the filing date for the 2023 Form 940.

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, nonprofit organizations, and Native American tribes. The FUTA tax liability is not due or reportable until January 31 of the following year.

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:

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.

Federal Unemployment Tax Act FAQs

Here is an overview of users’ most frequently asked questions about the federal unemployment tax act.

What is the Federal Unemployment Tax Act?

The Federal Unemployment Tax, or FUTA, which provides for payments of unemployment compensation to workers who have lost their jobs. Employers pay this tax and it is not withheld from employees’ wages.

Who Qualifies for FUTA Tax Credit?

If employers paid wages subject to state unemployment tax, they may receive a credit of up to 5.4% of FUTA taxable wages when filing Form 940. If an employer is entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.6%.

How Does FUTA Tax Work?

Under federal law, any business with employees is subject to the FUTA payroll tax. Employers then file a form 940 employer annual federal unemployment FUTA tax return each year based on the amount of FUTA tax paid. Employers file using their 9-digit employer identification number used to file their federal tax return.

Who is Exempt from FUTA Tax?

According to the IRS, organizations that are exempt from income under section 501(c)(3) of the Internal Revenue Code are also exempt from the unemployment tax act (FUTA).

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