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Understand Federal Unemployment Tax Act (FUTA) Credit Reduction States

by Intuit•35• Updated 2 weeks ago

This article clarifies the details of the Federal Unemployment Tax Act (FUTA) Credit Reduction states. It outlines the relevant rates for 2025 and explains how QuickBooks products manage these computations

What is a Credit Reduction State?

If your state has taken loans from the federal government and hasn't paid within the allowable time frame, your state will be part of the Credit Reduction State.

Employers from these states are required to pay additional unemployment tax when filing Form 940 and Schedule A. For 2024, Form 940 is due on February 2, 2026.

What is the standard FUTA tax credit rate?

The standard FUTA tax rate is 6.0% on the first $7,000 of wages per employee each year. Often, employers may receive a credit of 5.4% when they file their Form 940 (PDF), to result in a net FUTA tax rate of 0.6% (6.0% - 5.4% = 0.6%).

Credit Reduction States and Rates for 2025

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 hasn't repaid its loan in full.

For 2025, employers subject to FUTA in California will be assessed a general FUTA credit reduction additional amount of 1.2% on wages paid to employees. The US Virgin Islands will be assessed a general FUTA credit reduction additional amount of 4.5% on wages paid to employees.

StateCredit Reduction RateFUTA (0.6%) + Credit Reduction
California1.2%1.8%
US Virgin Islands4.5%5.1%

Complete details can be seen below:

How QuickBooks calculates FUTA Credit Reduction

Note: Not sure which payroll service you have? Here's how to find your payroll service.

QuickBooks Online Payroll automatically calculates the FUTA credit reduction tax at year-end. Be sure you have your bank account funded for this additional tax amount.

If automate taxes and forms is turned on

We’ll add the additional amount for FUTA Credit Reduction to your final FUTA payment for the year, and add the appropriate line items when we file Form 940.

If automate taxes and forms is turned off

You’ll see the additional FUTA amount when you attempt to create your final FUTA payment for the year. Once you approve the payment, all applicable fields will be populated when you generate Form 940 in QuickBooks.

If you paid wages in a credit reduction state, the credit reduction box will be marked on the Form 940 interview.

The wages and additional FUTA amount will automatically appear on the Schedule A, which is generated when you create Form 940 with credit reduction amounts. If your total amount due on Form 940 is more than $500, you'll need to make a payment prior to completing the form. If your total amount due on Form 940 is less than $500, you can make the payment at the same time you file the form.

The credit reduction amount won’t appear in the pay liabilities section in the payroll center. You need to make a liability adjustment to add the credit reduction amount to the Federal 940 tax due. 

  1. Go to Employees, then Payroll Taxes and Liabilities. 
  2. Select Adjust Payroll Liabilities.
  3. In the Date and Effective Date fields, select the last paycheck date of the affected year.
  4. In the Adjustment is for: section, select Company.
  5. Under the Item Name column, select Federal Unemployment.
  6. In the Amount column, enter the credit reduction amount. 
  7. Under Memo, enter a note about the adjustment for reference. 
  8. Select Accounts Affected, then OK.
  9. Select Affect liability and expense accounts for the transaction to reflect in the liability and expense accounts.
  10. Select OK twice.

We’ll debit the bank account we have on file for the additional amount for FUTA Credit Reduction and add it to your final FUTA payment for the year. We'll add the appropriate line items/schedules when we file Form 940.

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