You may think your payroll tax rate is set, but a small credit change can significantly increase what you owe per employee. Before you file Form 940, you’ll want to understand how the 2025 FUTA credit reduction affects your business and what steps to take now to avoid unexpected costs.
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Key Notes
- FUTA is a federal unemployment tax with a standard 6 percent rate on the first $7,000 of wages per employee.
- Most employers receive a credit of up to 5.4 percent when state unemployment taxes are paid on time.
- A credit reduction occurs when a state has an unpaid federal unemployment loan.
- For 2025, California faces a 1.2 percent reduction, which will increase the effective FUTA rate to 1.8 percent.
- The Virgin Islands carries a 4.5 percent reduction, resulting in a 5.1 percent FUTA rate.
- Employers must report affected wages on Schedule A of Form 940.
- Updating payroll software is essential to avoid underpaying FUTA.
- The increased tax amount is due by February 2, 2026.
