The Department of Labor announced in May that California, Connecticut, New York, and the U.S. Virgin Islands are FUTA Credit Reduction States. The three impacted states have a reduction in the FUTA credit of 0.6%. It results from an outstanding loan balance owed to the federal government at the start of the year for two consecutive years that has not yet been repaid.
New York used its reserves to pay off the remainder of the loan and likely will not be considered a FUTA Credit Reduction State in the future.
In 2025, California was designated as a FUTA Credit Reduction State, meaning its standard 5.4% FUTA credit is reduced by 0.6%, resulting in a 4.8% credit. Subtracting that from the 6.0% FUTA tax rate leaves California employers with a net FUTA rate of 1.2%. Connecticut may also face a 1.2% credit reduction due to maintaining an outstanding federal loan balance for four consecutive January 1 dates.
To break it down:
- Employers in most states will pay a maximum of $42 per employee ($7,000 × 0.6%).
- Employers in California and Connecticut will pay $84 per employee ($7,000 × 1.2%).
If you have 10 employees in CA or CT, you’ll owe $840 in FUTA tax, compared to $420 for a business in a non-reduction state — a significant difference. Multiply that by 50 employees, and the gap grows by thousands in FUTA taxes for businesses in credit reduction states.
On top of that, both states could face additional penalties in 2025 due to the Benefit Cost Rate (BCR) add-on:
- California’s BCR add-on could be 3.7%
- Connecticut’s BCR add-on could be 0.8%
Unless the states receive a waiver by July 1, the total FUTA credit reduction could increase to 4.9% for California and 2.0% for Connecticut.
This article is informational and does not constitute legal or financial advice. Consult with an employment lawyer or accountant for additional clarification on how these changes impact your company.
