‘Tis the season for the Internal Revenue Service (IRS) to determine what states owe them more Federal Unemployment Tax Act (FUTA)/ 940 taxes. Here’s what you need to know about FUTA and credit reduction states.

First, what are unemployment taxes?

The basics are that these taxes are paid by you, the employer, to the federal government to fund unemployment compensation benefits for employees who are out of work. You are required to pay if either of these apply:

  • You pay wages totaling in at least $1,500 per quarter.
  • You have at least one employee on any day for 20 weeks in a calendar year (regardless of if these weeks are consecutive).

How are you taxed?

Employers are taxed based on their type of business. So, if you have a higher unemployment rate in your particular type of business, the tax is typically higher.

What’s the current FUTA rate?

FUTA taxes are based on the gross pay of employees (wages or salaries). This tax percentage could change each year.  The FUTA tax rate is 6.0 percent of the first $7,000 you pay in wages to an employee. The IRS gives a 5.4 percent credit to employers paying state unemployment which reduces the FUTA tax to .60 percent.

Now, what is a credit reduction state?

According to the IRS, a state is a credit reduction state if it has taken loans from the federal government to meet state unemployment benefits liabilities and has not repaid the loans within the appropriate time frame. The IRS goes on to explain that a reduction in the usual credit against the full FUTA tax rate meant employers paying wages subject to UI tax in those states will owe a greater amount of tax.

This year, that state is California and the territory of the U.S. Virgin Islands. These areas had advance balances on Jan. 1, 2017 and did not repay all advances before Nov. 10, 2017.                                              

What this means:

If you are located in California or the U.S. Virgin Islands, or have employees in either location, there is a 2.1 percent increase of your FUTA tax, as reported on Form 940. 

For PrimePay clients:

PrimePay will draft the additional amount due on your last scheduled payroll of December 2017. The extra amount due will be up to $147 per employee, or 2.1 percent multiplied by taxable wages (up to $7,000).


You can learn more about this by clicking here to visit the IRS website.

The DOL also has a spreadsheet that you can download will more information. Click here to find that.  

PrimePay clients can also contact their Client Success Representative for any additional questions.