FAQ: 2024 FUTA Credit Reduction Updates
IRS NOTICE
For 2024, employers in certain states will see a reduced FUTA tax credit of 4.5%.
Normally, employers receive a FUTA tax credit of 5.4%. However, for California and New York, this credit is reduced by 0.9%, leaving a 4.5% credit. This change results in an effective FUTA tax rate of 1.5%. Since the FUTA wage base is $7,000, affected employers may owe up to $105 per employee in 2024.
- California
- New York
Frequently Asked Questions
Why wasn’t I notified earlier?
Credit reductions cannot be predicted in advance. They depend on two factors:
- The amount of state unemployment taxes employers paid during the year, and
- Whether the federal government provided loans to the state to fund unemployment benefits
What exactly is the FUTA Tax Credit?
The FUTA (Federal Unemployment Tax Act) tax is a federal tax collected by the IRS and applies to employers covered by state unemployment programs. The standard rate is 6.0% of the first $7,000 in taxable wages per employee. Eligible employers may normally reduce this by 5.4%, paying just 0.6%.
For 2024, employers in California and New York are not eligible for the full 5.4% credit. Instead, they receive a reduced credit of 4.5%, leading to an effective rate of 1.5%.
Why did my state’s credit get reduced?
When states borrow from the Federal Unemployment Trust Fund to cover unemployment benefits, they must repay those loans promptly. If repayment isn’t made for consecutive years, the IRS lowers the FUTA tax credit by 0.3% each year until the debt is cleared.
California, Connecticut, Illinois, and New York all had outstanding federal unemployment loans that affected their FUTA credits. As a result, in 2022, the credit dropped from 5.4% to 5.1%, increasing the FUTA tax rate to 0.9%.
Currently, California and New York still have unpaid loans. This means their 2024 FUTA credit is reduced by 0.9%, leaving them with a 4.5% credit and a 1.5% effective tax rate.
Learn more on the IRS website: IRS.gov →
How is this adjustment determined?
The additional amount is calculated by multiplying the total FUTA-taxable wages (up to $7,000 per employee) by the reduction amount (0.9%).
Note: If certain wages were not subject to state unemployment tax, they are excluded from this calculation.
How can I see this adjustment in Beyond?
- Schedule A in Filings
In Beyond, you’ll find this adjustment in Schedule A of Form 940. The credit reduction amount is shown under the “Credit Reduction” column for each state. - Employee taxable wages
If you have workers in multiple states, the easiest way to review taxable wages is through each state’s quarterly unemployment returns, available in the Filings menu. These reports list each employee’s taxable wages per quarter, making it easier to determine FUTA liability.
Keep in mind: no matter what the state’s taxable wage base is, FUTA credit reductions only apply to the first $7,000 of wages per employee in 2024.
Example:
On California’s Quarterly Contribution Return for Q1 of 2024, the total UI taxable wages for all employees might be listed as $14,000.
Looking at individual employees:
- Briana earned $17,500 in subject wages.
- Shelley earned $21,183.04 in subject wages.
Since both exceeded $7,000 by the end of Q1, the FUTA credit reduction applies to the full $7,000 for each employee.
Note: If employees had not reached $7,000 by Q1, you would continue adding wages from following quarters until reaching that threshold, or until their year-to-date wages reached $7,000.
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