HR Fast Facts: What is a FUTA credit reduction state?

If a state borrows money from the federal government to cover its state unemployment benefits liabilities and does not pay them back within the set timeframe, it is considered to be a credit reduction state.

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If a state borrows money from the federal government to cover its state unemployment benefits liabilities and does not pay them back within the set timeframe, it is considered to be a credit reduction state.

This impacts employers in that particular state as they will pay more in FUTA taxes to the federal government.

FUTA credit reductions are reported on the IRS 940 filing form for customers in an eligible FUTA  credit reduction state. For more information about FUTA credit reduction and how it impacts unemployment taxes, please see the following IRS page.

For specific information on how this was handled for California in 2016, please see the following EDD page.

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