Credit Reduction State
Summary Definition: A state with unpaid federal loans that diminish the maximum tax credit local employers can claim when paying federal unemployment taxes.
What are Credit Reduction States?
A credit reduction state is a state that borrowed funds from the federal government to cover its unemployment insurance benefits but hasn’t repaid those funds within a specified timeframe.
Under the Federal Unemployment Tax Act (FUTA), employers typically receive a credit of up to 5.4% against the standard 6.0% FUTA tax rate, resulting in a net federal unemployment tax rate of 0.6% per employee.
If, however, a state has an outstanding federal loan balance on January 1 for two consecutive years and fails to repay the full amount by November 10 of the second year, the maximum FUTA credit local employers can claim is reduced by 0.3%. An additional FUTA credit reduction occurs for each subsequent year the amount remains unpaid.
For example, suppose a state borrowed federal funds in 2021 and had an unpaid balance on January 1 in 2022 and 2023. If the state doesn’t repay the full amount by November 10, 2023, the total credit it could claim for the 2023 tax year would be 5.1% (5.4% - 0.3%). If the amount still isn’t repaid by November 10, 2024, the maximum credit for the 2024 tax year is further reduced to 4.8%.
FUTA Credit Reduction States 2024
As of December 18, 2024, only two states have a FUTA credit reduction. As a result, employers in those states owe more FUTA tax when filing their 2024 tax returns (i.e., Form 940) than those in other states.
| State | 2024 Credit Reduction | Remaining FUTA Tax Credit | 2024 FUTA Rate | 2024 FUTA Tax* |
|---|---|---|---|---|
| California | 0.9% | 4.5% | 1.5% | $105 |
| New York | 0.9% | 4.5% | 1.5% | $105 |
*Per employee (1.5% x $7,000)
If those states still have an unpaid balance by November 10, 2025, the maximum credit will be reduced to 4.2%, and employers will have to pay up to $126 in FUTA taxes (per employee) when filing their 2025 tax returns in 2026.
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