FUTA Credit Reductions for 2024

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 is happening, and how it impacts employers.

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 are required to make their deposit at the end of that same quarter. 

• Standard FUTA Rate: The FUTA tax rate is set at 6.0% on the first $7,000 of wages for each employee per year.
• FUTA Credit: Employers who pay state unemployment taxes in a timely manner receive a credit of 5.4%, which lowers an employer's FUTA tax rate to 0.6%.

However, if states borrow money for their unemployment accounts and fail to pay off these loans within a certain period of time, 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 own 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

How to Prepare for Credit Reductions

Employers in affected states should expect increased FUTA tax obligations:

1. 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.
2. 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 Complete Payroll is Supporting Employers

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.

Complete Payroll is 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.