A state is a credit reduction state if it has taken loans from the federal government to meet its state unemployment benefits liabilities and has not repaid the loans within the allowable time frame.

According to the U.S. Department of Labor, California and New York, along with the U.S. Virgin Islands could not pay back their federal loans by the November 10, 2023 deadline and are subject to reductions in the Federal Unemployment Tax Act (FUTA) credit for 2023.

Specially, for 2023, California and New York are subject to a FUTA credit reduction of 0.6% and the Virgin Islands is subject to a FUTA credit reduction of 3.9%. Connecticut, Illinois, and the Virgin Islands were also subject to a credit reduction for 2022.

A reduction in the usual credit against the full FUTA tax rate means that employers paying wages subject to unemployment insurance (UI) tax in those states will owe a greater amount of tax. As a result, if you are an employer with wages in one or more of the impacted areas mentioned above, then you are subject to the FUTA Credit Reduction for 2023.

The additional FUTA tax must be deposited by the due date of the 2023 federal Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, which is due January 31, 2024.

Please reach out to your DK professional with any questions.