Federal Unemployment Tax Act (FUTA) Credit Reduction

Federal Unemployment Tax Act (FUTA) Credit Reduction

The U.S. Department of Labor has notified the Internal Revenue Service (IRS) and the California Employment Development Department that California is now a credit reduction state as a result of its outstanding loan balances. Per the IRS website:

"Credit reduction state. A state that has not repaid money it borrowed from the federal government to pay unemployment benefits is a "credit reduction state." The Department of Labor determines these states. If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, that employer must pay additional federal unemployment tax when filing its Form 940."

Due to California carrying an outstanding loan balance for two consecutive years, the FUTA credit will decrease from 5.4 percent to 5.1 percent on January 1, 2012. In essence, California employers will incur a 0.3% FUTA credit reduction. Employers will use IRS Schedule A (Form 940), Part 2, to calculate the FUTA tax.

If you have questions on the FUTA credit reduction, Form 940, or Publication 15(2011) (Circular E) Employer's Tax Guide, please contact the IRS at http://www.irs.gov/