The FUTA Credit Reduction
What is it?
For-profit employers pay federal (FUTA) and state unemployment insurance (UI) taxes on wages paid. The FUTA tax rate is 6.0%, but employers receive an offsetting credit of 5.4% for payment of state UI taxes. This makes the effective FUTA tax rate 0.6 %, which applies to wages paid up to a limit of $7,000 per worker, or $42 per employee per year. However, when state UI trust funds are depleted, states draw from a designated federal loan account, and if such loans are not repaid within two years, part of the 5.4% FUTA tax credit is incrementally reduced each year – a.k.a., credit reduction. This increases the effective FUTA tax rate in affected states.
When this “credit reduction” applies, the FUTA tax rate typically increases by 0.3%, or $21 per employee. This increase is payable in January of the following calendar year with the Internal Revenue Service (IRS) FUTA tax return, Form 940. This credit is further reduced each year by 0.3% until loans are repaid.
If you have any questions regarding the FUTA, don’t hesitate to reach out to us toll free at 888.540.0752 or at www.omegacomp.com.