FUTA Credit Reductions: What Does This Mean For Your Tax Bill?

FUTA Credit Reductions: What Does This Mean For Your Tax Bill?

As staffing company business owners and managers, you’ve had a lot to think about and adapt to in the last 18 months or so. That’s why part of our job at TRICOM is to make sure we stay abreast of any changes – tax, legislative, or otherwise – that could impact your business.

One such change is the FUTA Credit Reduction.

The standard FUTA tax rate is 6% on the first $7,000 of wages subject to FUTA. Employers receive a credit of 5.4% if they pay their quarterly unemployment in a timely manner using Form 940, making the rate .6% (the percentage we are used to). If your state has a federal loan for unemployment that has not been paid within the given timeframe, your credit is reduced by .3% each year.

If states are struggling to come up with the funds to pay Unemployment Insurance benefits for the residents of their state, they may take out a loan from the Federal Unemployment Trust Fund. If a state fails to pay that loan back and has an outstanding loan balance on January 1 for two consecutive years and does not repay the full amount of its loans by November 10 of the second year, then the FUTA credit rate employers in that state pay is reduced – which in effect means that you’ll pay a higher FUTA tax rate.

With the high unemployment rates during the last 18 months of the pandemic, we’re seeing some unprecedented loan amounts from the Federal Unemployment Trust Funds.

As of September 30, 2021, there were 12 states or territories that had outstanding FUTA loan balances totaling over $45.5 billion. The list is as follows:















New Jersey 


New York 






Virgin Islands 





To put this into perspective, during the last Great Recession in 2009, the national outstanding FUTA loan balance was over $2.289 billion. However, the number of states and territories with outstanding loan balances was significantly higher.

The Department of Labor runs the loan program and announces any credit reduction states after the November 10 deadline each year. According to the IRS, “The result of being an employer in a credit reduction state is a higher tax due on the Form 940.

For example, an employer in a state with a credit reduction of 0.3% would compute its FUTA tax by reducing the 6.0% FUTA tax rate by a FUTA credit of only 5.1% (the standard 5.4% credit minus the 0.3% credit reduction) for an effective FUTA tax rate of 0.9% for the year.

Any increased FUTA tax liability due to a credit reduction is considered incurred in the fourth quarter and is due by January 31 of the following year.”

Currently, the Virgin Islands is the only state or territory at risk for losing their FUTA credit for 2021. However, all of the states / territories listed above will be at risk for losing their FUTA credit in 2022 if their loans aren’t repaid by November 2022.

Regular payroll providers do not proactively withhold additional federal unemployment taxes to offset this credit reduction – meaning that staffing companies may be on the hook for a large tax bill at year-end. If you don’t have the funds to pay (and tax liabilities can be in the tens of thousands of dollars), these providers may withhold their quarterly reporting.

TRICOM clients needn’t worry. TRICOM proactively withholds unemployment taxes for clients in states who aren’t paying back their federal unemployment loans, so there are no big tax surprises at the end of the year. Even if a new state is added, TRICOM will proactively let you know as soon as new states are announced (usually the second week in November) and will begin a withholding plan at that time to give you plenty of time to collect the needed funds.

If a state does pay their federal unemployment loan back in time, TRICOM reimburses those clients the amount that had been withheld to cover those potential costs.

To see if your state is currently facing a FUTA credit reduction, visit to the Department of Labor at: https://oui.doleta.gov/unemploy/budget.asp

Or contact Mary Jo Heim at mheim@tricom.com or at 262-509-6214 with any questions.