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California, U.S. Virgin Islands See Their FUTA Credit Amount Reduced for 2017 Filing

  • The Federal Unemployment Trust Fund gives loans to states when they lack funds to pay unemployment insurance benefits.
  • FUTA reduces its credit rate for states that have outstanding loan balances over two consecutive years, until those states repay their loans.
  • California and the U.S. Virgin Islands had FUTA loans outstanding for 2017, and consequently the DOL dropped their FUTA credit from 5.4 percent to 3.3 percent, with a net FUTA tax rate of 2.7 percent.
  • Businesses in FUTA credit-reduction states must pay additional unemployment tax when filing IRS Form 940 and Schedule A for 2017.

FUTA helps states cover unemployment insurance for their residents

The federal government partners with states and territories to provide unemployment insurance. Federal guidelines dictate how states and territories establish parameters for their unemployment programs, such as payroll tax rates and wage bases for eligible workers. Employers pay state unemployment insurance taxes, which go into the Federal Unemployment Trust Fund, administered by the U.S. Department of Labor (DOL). Each state has its own account to cover expected unemployment insurance claims.

Some states take loans from FUTA if they lack the funds to pay unemployment insurance benefits for their residents. However, if a state has outstanding loan balances for two consecutive years, FUTA will reduce its credit rate until the loan is repaid. This requires the state's businesses to pay additional unemployment tax when filing Internal Revenue Service (IRS) Form 940 and Schedule A for 2017, which will be due by Jan. 31, 2018.

The FUTA credit reduction only applies to employers that pay state unemployment insurance wages to the states included here.


Credit Reduction Percentage

Maximum Tax Increase Per Employee

2017 Net FUTA Rate





Virgin Islands




In mid-November, the DOL released the listing of FUTA Credit Reduction states for 2017. California and the U.S. Virgin Islands had FUTA loans still outstanding. As a result, the DOL is reducing their FUTA credit amount for the 2017 tax filing in order to recover funds still owed. California and the U.S. Virgin Islands will see their credit drop from 5.4 percent to 3.3 percent for 2017, making their FUTA tax rate 2.7 percent. All other employers in states receiving FUTA funds will receive the full FUTA credit of 5.4 percent.

California and the U.S. Virgin Islands will have their 2017 FUTA credit reduced 2.1 percent, for a maximum tax increase per employee of $147. Again, their net FUTA tax rate is 2.7 percent.

FUTA helps states in times of high unemployment

The government established the FUTA fund to cover state and federal unemployment costs and to provide loans to the states in times of high unemployment. When a state exhausts its unemployment fund, it can borrow money from the federal government to cover its unemployment expenses. States have until November of the second year after receiving the loan to pay it back or be considered insolvent by the DOL.

If the loan(s) are not paid back on time, the government will reduce the available FUTA credit amount for employers in the affected state. Generally, all employers pay 6.0 percent on the first $7,000 of wages. When they file their Form 940, they are eligible for a 5.4 percent credit, effectively making their FUTA tax rate 0.6 percent.

Businesses residing in a credit reduction state have less available credit and consequently a higher FUTA tax. For instance, if a state has a loan from the federal government outstanding for more than one year, the DOL raises the effective FUTA rate by 0.3 percent, making the effective FUTA rate 0.9 percent after the employer receives the 5.4 percent credit for timely payments to its state unemployment insurance fund. The DOL adds a 0.3 percent increment to the FUTA rate each year if the state continues to carry an outstanding loan. This continues until the loan is fully repaid.

If you run a business in a FUTA credit-reduction state and aren't sure how to calculate, file, or otherwise meet your unemployment insurance obligations, consider asking a payroll provider for help. Paychex tax services are staffed with experts who can guide you through these challenges.

andrew gargana headshot

Andrew Gargana is the senior federal compliance analyst within Compliance Risk Management for Paychex, Inc., based in Rochester, NY. He leads the federal payroll tax compliance activities of the company, which serves over 605,000 clients in all 50 states. The federal compliance analysts monitor all legislation and function as the liaison with the company’s Product Management and Development divisions to ensure regulatory matters affecting the firm’s payroll processing and tax filing platforms are implemented.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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