FUTA Credit Reduction State

Retroactive to January 1, 2012, Arizona is now one of the 19 “FUTA Credit Reduction States”,

Under the provisions of the American Federal Unemployment Tax Act (FUTA), a Federal tax is levied on employers covered by the Unemployment Insurance program program at a current rate of 6.0% on wages up to $7,000 a year paid to a worker. The law, however, provides a credit against federal tax liability of up to 5.4% to employers who pay state taxes timely under an approved state UI program. Generally, employers may receive this credit of 5.4% when they file their Form 940 (PDF), Employer’s Annual Federal Unemployment (FUTA) Tax Return, to result in a net FUTA tax rate of 0.6% (6.0% – 5.4% = 0.6%).

The credit against the Federal tax may be reduced if the state has an outstanding advance (commonly called a “loan”). When states lack the funds to pay UI benefits, they may obtain loans from the federal government. To assure that these loans are repaid, and in accordance with Title XII of the Social Security Act, the federal government is entitled to recover those monies by reducing the FUTA credit it gives to employers, which is the equivalent of an overall increase in the FUTA tax. When a state has an outstanding loan balance on January 1 for two consecutive years, and the full amount of the loan is not repaid by November 10 of the second year, the FUTA credit will be reduced until the loan is repaid. This process is commonly called FUTA Credit Reduction and was designed as an involuntary repayment mechanism. The reduction schedule is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid. From the third year onward, there may be additional reduction(s) in the FUTA tax credit (commonly dubbed “add-ons”).

As of November 11, 2012, there were 19 states that had outstanding UI federal loans and as a result, employers in these states will pay extra FUTA taxes that are effective retroactively to January 1, 2012.

Below is a list of FUTA Credit Reduction states. The rates listed in the “Potential” column for 2013 and 2014 are projected under the assumption that the Title XII loans on those states will not be repaid by November 10th of the column year.

State Effective FUTA   Tax Rate
Actual Potential
2012 2013 2014
Arizona 0.90% 1.20% 1.50%
Arkansas 1.20% 1.50% 1.80%
California 1.20% 1.50% 1.80%
Connecticut 1.20% 1.50% 1.80%
Delaware 0.90% 1.20% 1.50%
Florida 1.20% 1.50% 1.80%
Georgia 1.20% 1.50% 1.80%
Indiana 1.50% 1.80% 2.10%
Kentucky 1.20% 1.50% 1.80%
Missouri 1.20% 1.50% 1.80%
Nevada 1.20% 1.50% 1.80%
New Jersey 1.20% 1.50% 1.80%
New York 1.20% 1.50% 1.80%
North Carolina 1.20% 1.50% 1.80%
Ohio 1.20% 1.50% 1.80%
Rhode Island 1.20% 1.50% 1.80%
South Carolina* 1.80% 2.10%
Vermont 0.90% 1.20% 1.50%
Virgin   Islands** 2.10% 1.50% 1.80%
Wisconsin 1.20% 1.50% 1.80%