When a state borrows from the federal government to pay unemployment benefits and does not repay in time, employers in that state lose part of their FUTA credit — raising their effective federal unemployment (FUTA) tax. This FUTA credit reduction calculator shows the extra tax you owe on Form 940. Enter your number of employees who earned at least $7,000 and the applicable credit reduction rate to see the additional FUTA per worker and your total liability.
The standard FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages. Employers who pay their state unemployment tax on time normally claim a 5.4% credit, dropping the effective FUTA rate to 0.6% ($42 per employee per year). When a state has an outstanding federal unemployment loan for two or more consecutive years, the U.S. Department of Labor reduces that credit by 0.3% in the first year and an additional 0.3% each year the loan remains unpaid.
| Situation | Effective FUTA rate | Per employee (on $7,000) |
|---|---|---|
| Normal (full credit) | 0.6% | $42.00 |
| 0.3% reduction (yr 1) | 0.9% | $63.00 |
| 0.6% reduction (yr 2) | 1.2% | $84.00 |
| 0.9% reduction (yr 3) | 1.5% | $105.00 |
The extra tax is retroactive to January 1 of the tax year and is paid with your Form 940, due January 31.
Say you have 10 employees who each earned over $7,000, in a state with a 0.9% credit reduction:
That $63 per worker is on top of the normal $42, so your effective per-employee FUTA in a 0.9%-reduction state is $105. The more employees you have, the larger the year-end surprise — which is why you reserve for it.
Credit reduction states change year to year as states repay (or fail to repay) their loans. The DOL publishes the final list each November, and the IRS reflects it on the Schedule A (Form 940). In recent years the list has been short — sometimes only one or two states plus the U.S. Virgin Islands, which has carried a balance for many years. Do not assume your state is affected; check the current-year DOL announcement. If your state repaid its loan, your credit is restored and you owe only the normal 0.6%.
If you paid wages in a credit-reduction state, you complete Schedule A (Form 940), enter the state, its reduction rate, and the FUTA taxable wages there, then carry the additional tax to Form 940. Because the liability is retroactive to the full year, it can push your total FUTA over the $500 deposit threshold — in which case the extra is generally due with the return by January 31 rather than as a quarterly deposit. Plan cash flow accordingly. See our deposit schedule calculator for the related 941 rules.
It is a reduction in the 5.4% FUTA credit for employers in states that have an unpaid federal unemployment loan for two or more consecutive years. The credit drops by 0.3% the first year and another 0.3% each year the loan is outstanding, raising the employer's effective FUTA rate above the usual 0.6%.
It depends on your state. The U.S. Department of Labor publishes the official list of credit-reduction states and their rates each November for that tax year. Many years only one or two states plus the U.S. Virgin Islands are affected; states that repay their loans owe only the standard 0.6%. Always check the current DOL list.
Multiply each employee's first $7,000 of wages by the credit reduction rate. For 10 employees over $7,000 at a 0.9% reduction, that is $70,000 × 0.009 = $630 extra, on top of the normal $420 (0.6%) FUTA, for $1,050 total. This calculator does the math from your employee count or total FUTA wages.
Yes. When a state is named a credit-reduction state, the higher rate applies retroactively to January 1 of that tax year and is paid with Form 940, generally due January 31 of the following year. That is why the extra liability can arrive as a lump-sum surprise.
On Schedule A (Form 940). You list each credit-reduction state, its reduction rate, and the FUTA taxable wages paid there, then carry the additional tax to the main Form 940. The IRS pre-prints the applicable rates on Schedule A each year.