The Department of Labor has announced the states that face FUTA credit reductions for 2014. A state is a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame. A reduction in the usual credit against the full FUTA tax rate means that employers paying wages subject to unemployment (UI) tax in those states will owe a greater amount of tax.
The standard FUTA tax rate is 6.0% on the first $7,000 of wages subject to FUTA, but employers may receive a credit of 5.4% when they file their Form 940 Employer’s Annual Federal Unemployment Tax Return, to result in a net FUTA tax rate of 0.6% (6.0% – 5.4% = 0.6%). If a state has outstanding loan balances on January 1 for two consecutive years, and does not repay the full amount of its loans by November 10 of the second year, the FUTA credit rate for employers in that state will be reduced until the loan is repaid.
The reduction schedule is 0.3% for the first year the state is a credit reduction state, another 0.3% for the second year, and an additional 0.3% for each year thereafter that the state has not repaid its loan in full. Additional offset credit reductions may apply to a state beginning with the third and fifth taxable years if a loan balance is still outstanding and certain criteria are not met. These credit reductions are made from the regular credit of 5.4%. While employers in states without credit reductions will have a FUTA tax rate of .6%, employers in states with a further credit reduction will incur a tax rate of .6% plus the rate of the credit reduction.
The FUTA credit reduction is reported on the annual 940 tax return. Any increased FUTA tax liability due to a credit reduction is considered incurred in the fourth quarter and is due by January 31 of the following year.
For 2014, fifteen states and one jurisdiction faced a potential FUTA credit reduction, however, seven of those states repaid their outstanding advances before November 10th thereby eliminating any FUTA credit reduction. Below are the locations with credit reductions, the rate of the reduction and the total FUTA tax to be paid in 2014.
| Final 2014 FUTA | Final 2014 | |
| State | Credit Reduction | FUTA Tax Rate |
| California | 1.2% | 1.8% |
| Connecticut | 1.7% | 2.3% |
| Indiana | 1.5% | 2.1% |
| Kentucky | 1.2% | 1.8% |
| New York | 1.2% | 1.8% |
| North Carolina | 1.2% | 1.8% |
| Ohio | 1.2% | 1.8% |
| Virgin Islands | 1.2% | 1.8% |
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