As someone who has spent nearly 40 years in the industry, I understand the importance of staying informed about changes with unemployment tax that could increase risk for employers across the country. A hot topic this year is the Federal Unemployment Tax Act (FUTA) credit reductions and additional add-ons. Several states have been in the news regarding this for the last several years and the tax risk is mounting as a result.
Overview of a FUTA Credit Reduction
Most every employer in the United States pays federal unemployment taxes for employees in their hire. They pay tax on the first $7,000 each person earns, each year. The tax rate at which they pay is 6%. However, if they pay all taxes timely and in full to the state each quarter, they are eligible for a 5.4% reduction in tax. So they would pay only 0.6% rather than the full 6% for each employee. When a state unemployment trust fund balance is in peril of becoming insolvent, the Governor of the state may request an advance from the federal government through a Title XII loan. Since it is a loan, it must be repaid or risk accruing interest and a reduction in the 5.4% credit to which they would otherwise be entitled. If the loan is not repaid within the deadline, rather than a 5.4% credit, they would receive only a 5.1% credit; a 0.3% reduction. For each consecutive year there is an outstanding balance, a further reduction in the credit would be instituted, as well as the potential for other add-ons.
In January 2025, the United States Department of Labor, Employment and Training Administration, Office of Unemployment Insurance outlined the states and territories that might experience not only a FUTA credit reduction but also a 2.7% add-on and a Benefit Cost Rate (BCR) add-on. These changes are due to several factors:
- Outstanding Federal Advances: Each of these states and territories has passed at least two consecutive January 1s with an outstanding federal advance. This situation triggers a series of additional FUTA credit reductions.
- Incremental FUTA Credit Reductions: For each consecutive January 1 with an outstanding advance, after the second one, employers are subject to an additional 0.3% reduction in FUTA credit. This reduction increases following the third consecutive January 1 with an outstanding advance.
- 2.7% Add-On: After the third consecutive January 1 with an outstanding advance, employers face an additional FUTA credit reduction known as the 2.7% add-on.
- BCR Add-On: States are also potentially subject to the BCR additional credit reduction formula, which applies when five consecutive January 1s have passed with an outstanding advance.
State Responses and Implications
Each of the states or territories has taken various actions in response to these potential changes:
- California: The Governor has requested a waiver of the BCR add-on in a timely manner.
- Connecticut: Connecticut does not have an outstanding balance and does not foresee having one between now and December 31, 2025, eliminating the need for a waiver request.
- New York: New York has paid the accrued interest on its advances, and Governor Hochul has signed the 2026 fiscal year budget, which provides for full payment of the outstanding balance.
- Virgin Islands: The Virgin Islands do not have the 2.7% add-on or the BCR add-on, so the waiver does not apply.
What This Means for Employers
This is encouraging news for employers in the affected states and territories. With many states still working to replenish their fund balances following their depletion during the pandemic, addressing these outstanding balances is a significant step forward. Employers should celebrate these efforts to manage Title XII advances effectively.
As we continue to monitor this situation, we will keep you updated on any future changes. Your business’ success is our priority, and we are here to support you through these developments. Stay tuned for more updates and insights!