Potential 2025 FUTA Credit Reductions: What You Need To Know

The Federal Unemployment Tax Act (FUTA) is a key part of unemployment insurance in the US, providing funding to state unemployment programs. However, employers in certain states may face increased FUTA taxes in 2025 due to outstanding federal advances. If you’re an employer in California, Connecticut, New York, or the Virgin Islands, you should be aware of potential credit reductions that could increase your FUTA tax rates. Here’s a breakdown of the situation and what you need to know.

What are FUTA credit reductions?

FUTA credit reductions occur when a state has an outstanding federal loan under Title XII of the Social Security Act. If a state does not repay its federal advances by November 10 of a given year, employers in that state face a reduction in the FUTA tax credits they can claim on IRS Form 940, the Employer’s Annual Federal Unemployment Tax Return.

Under normal circumstances, the FUTA tax rate is 6.0% on the first $7,000 of wages paid to each employee. However, most employers can receive a 5.4% credit, which effectively reduces the rate to 0.6%. If a state has outstanding loans, that credit is reduced, resulting in a higher FUTA tax rate.

Why might employers in certain states face higher FUTA taxes in 2025?

The US Department of Labor has identified several states that had outstanding Title XII advances as of January 1, 2025. If these states do not repay their advances by November 10, 2025, employers in those states may face the following credit reductions:

California: 4.9%
Connecticut: 2.0%
New York: 2.3%
Virgin Islands: 4.5%

These reductions are due to the following:

A 0.3% reduction for each consecutive year the state has an outstanding loan
A 2.7% add-on for states with loans outstanding for three consecutive years (this is an alternative to the BCR add-on, not in addition to it)
A Benefit Cost Rate (BCR) add-on, applicable to states with loans outstanding for five or more consecutive years (this is an alternative to the 2.7% add-on, not in addition to it)

These reductions could lead to significant increases in FUTA taxes for employers in these states.

How does the Benefit Cost Rate (BCR) affect FUTA taxes?

For 2025, certain states also face an additional BCR charge due to prolonged outstanding federal advances. The BCR is a separate calculation that impacts employers in states with longstanding loan balances. In 2025, the additional BCR charges for the affected states are as follows:

California: An additional 3.7% on top of the existing 1.8%, totaling up to $385 per employee per project
New York: An additional 1.1% on top of the existing 1.8%, totaling up to $203 per employee per project
Connecticut: An additional 0.8% on top of the existing 1.8%, totaling up to $182 per employee per project
Virgin Islands: No percentage increase on top of the existing 4.5%

What should employers do to prepare for these potential tax changes?

Employers in California, Connecticut, New York, and the Virgin Islands should be aware of these increases to their FUTA tax rates. Here are a couple steps to take:

Stay Informed: Keep up to date with any updates from the US Department of Labor regarding potential relief or further credit reductions. Some states may qualify for relief through avoidance measures, caps on reductions, or fifth-year waivers.

Consult with Payroll Professionals: If you’re unsure about how these changes impact your business, consider consulting with payroll experts or tax advisors who are familiar with FUTA regulations.

Will these changes apply to all states?

No. These credit reductions only apply to states that have an outstanding federal advance. As of January 1, 2025, the affected states are California, Connecticut, New York, and the Virgin Islands. Employers in these states may face higher FUTA taxes if the states don’t repay their loans by the November 10 deadline.

What are the long-term implications?

If these states do not repay their outstanding balances by the end of 2025, the FUTA credit reductions could continue to increase in future years. Employers in these states should plan for the possibility of continued tax rate hikes in the coming years, especially if the states’ loan balances remain unresolved.

Stay informed

It’s crucial for employers in California, Connecticut, New York, and the Virgin Islands to stay on top of these changes and understand how they could impact their payroll taxes in 2025. For more information, visit the US Department of Labor’s website or reach out to your payroll tax department for specific guidance.