For tax year 2025, employers in California and the U.S. Virgin Islands will see higher federal unemployment tax rates due to FUTA credit reductions.
States and Territories Affected by Reductions
California did not pay off its federal loan by the deadline. As a result, employers face a 1.2% credit reduction for 2025. The FUTA tax rate rises from 0.6% to 1.8%, with a maximum tax per employee set at $126.
U.S. Virgin Islands has carried a loan balance for several years. Employers now face a 4.5% credit reduction for 2025, raising the FUTA tax rate to 5.1%, with a maximum tax per employee of $357.
Understanding the FUTA Credit Reduction
States or territories that borrow from the federal government for unemployment benefits and do not repay those loans within two years are subject to FUTA credit reductions. This starts at 0.3% and increases each year until the loan is repaid. The longer the debt persists, the higher the FUTA tax rate for employers in those states. For more information on the FUTA Credit Reduction, please see IRS.gov.
What Should Employers Do?
Stay informed about changes to federal unemployment tax, particularly if your business operates in California or the U.S. Virgin Islands. CBIZ will support you in maintaining compliance with the FUTA credit reduction and any additional FUTA liabilities for 2025.
For CBIZ HCM clients, we support you by identifying affected employers, communicating next steps, and managing the filing and payment process. We will continue to provide updates as federal guidance develops.
Have questions about how the FUTA credit reduction could impact your organization? Connect with a CBIZ HCM advisor.
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