FUTA credit reductions occur when states have outstanding loans from the Federal Unemployment Trust Fund that they fail to repay within a specified timeframe. For 2024, both California and New York are confirmed as FUTA credit reduction states, facing a reduction of 0.9% due to their continued outstanding loans.
Employers in California and New York will experience higher effective FUTA tax rates because they will lose part of the credit that would typically reduce their tax burden. The standard FUTA tax rate is 6%, but with a typical credit of 5.4%, employers usually pay an effective rate of 0.6%. However, due to the credit reduction, this effective rate will increase to 1.5% for employers in these states.
Below is the Labor Department announcement about 2024 credit reduction states:
Final 2024 Federal Unemployment Tax Act (FUTA) Credit Reductions (Updated – November 12, 2024): Four states faced a potential FUTA credit reduction in 2024. However, one of these states repaid their outstanding advances before November 10, 2024, thereby avoiding a FUTA credit reduction. Two states had an outstanding advance on each January 1 from 2021 through 2024, and did not repay all their advances before November 10, 2024. Therefore employers in these states face a 0.9% credit reduction. The US Virgin Islands (USVI) had an outstanding advance on each January 1 from 2010 through 2024, and did not repay all outstanding advances before November 10, 2024. The US Virgin Islands applied for a waiver of the fifth year (BCR) add-on and was determined to be eligible for the waiver, therefore employers in the USVI will face a 4.2% credit reduction.
Final 2024 FUTA Credit Reductions:
California: 0.9%
Connecticut: 0.0%
New York: 0.9%
Virgin Islands: 4.2%
As an employers in a credit reduction state you are required to complete Schedule A (Form 940) and attach it to Form 940. Make sure to follow these steps:
- Check the appropriate box on line 2 of Form 940 to indicate they are subject to credit reduction.
- Report the FUTA taxable wages paid in the credit reduction state
- Calculate the additional tax by multiplying the FUTA taxable wages by the credit reduction rate for their state.
Our Payroll Mate software prints form 940 and Schedule A for employers in credit reduction states.