What is FUTA Credit Reduction?

The Federal Unemployment Tax Act (FUTA) provides funds for paying unemployment compensation to workers who have lost their jobs. Employers pay federal and state unemployment taxes, with the FUTA tax rate set at 6% of the first $7,000 paid to each employee per year. However, employers can receive a credit of up to 5.4% when they pay their state unemployment taxes on time and in full. This effectively reduces the FUTA tax rate to 0.6%, which is the default rate in use at Salsa.

A FUTA credit reduction occurs when a state has borrowed funds from the federal government to cover its unemployment benefits and has not repaid the borrowed amount within the allowed time frame. In such cases, the state's employers may experience a reduction in the credit they receive, resulting in an increase in the effective FUTA tax rate they have to pay.

This reduction in the credit effectively raises the FUTA tax rate for affected employers, leading to higher federal unemployment taxes. States that have outstanding federal loans to cover unemployment benefits may trigger this credit reduction, impacting employers within those states.