FUTA Credit Reduction States 2026: What You Owe

This article is for general information, not tax or legal advice. Credit reduction rates for a year are not final until the Department of Labor issues its determination in November, and 2026 figures here are projections. Verify current numbers with the IRS and the DOL, or talk to a payroll professional before you file.

If you run payroll in California or the US Virgin Islands, your FUTA bill is higher than the usual $42 per employee, and it may climb again next year. The reason is a mechanic called the credit reduction, and the confusing part is timing: one year’s number is settled fact while the next year’s is still a projection.

A lot of guides blur those two together. This one keeps them separate. Below is what is final for 2025, what is only projected for 2026, why the list is so short, and the exact per-employee math so you can budget for it.

What the FUTA credit reduction actually is

FUTA, the Federal Unemployment Tax Act, has a headline rate of 6.0% on the first $7,000 of each employee’s wages. Almost no employer pays that. Paying your state unemployment tax on time earns a credit of up to 5.4%, which drops the net rate to 0.6%, or $42 per employee per year. If that whole setup is new to you, our FUTA tax guide walks through it from the top.

A credit reduction is what happens when a state borrows from the federal government to pay unemployment benefits and does not pay the loan back fast enough. When that happens, the federal government claws back part of the 5.4% credit from every employer in that state.

You did nothing wrong. Your state fell behind on a loan, so your slice of the 5.4% credit shrinks and your effective FUTA rate goes up. The reduction starts at 0.3% and grows by another 0.3% for each additional year the loan stays unpaid.

That is the whole idea. The rest is knowing which states are hit, by how much, and when the number becomes official.

FUTA credit reduction states for 2025 (final)

For tax year 2025, the numbers are settled. The DOL made its determination after November 10, 2025, and the Federal Register published the list on January 12, 2026. Employers paid the extra amount with the Form 940 due February 2, 2026.

Two jurisdictions are affected:

California: 1.2% reduction. Effective FUTA rate of 1.8% (0.6% plus 1.2%). That comes to about $126 per employee, up from $42.
US Virgin Islands: 4.5% reduction. Effective FUTA rate of 5.1% (0.6% plus 4.5%), or about $357 per employee.

These are not estimates. If you had wages in either place during 2025, this is what you owed on the return you have already filed or are reconciling now.

One detail is worth flagging: California’s 1.2% figure was actually the lower outcome. The state qualified for a waiver of an additional surtax (more on that below), which held the reduction down. Without the waiver it would have been higher.

FUTA credit reduction states for 2026 (projected, not final)

This is where employers get tripped up. As things stand in mid-2026, there is no official 2026 credit reduction list yet. What exists is the DOL’s potential credit reduction list, released in spring 2026. It is a projection, not a determination.

The binding decision does not happen until after November 10, 2026. Any extra tax is then paid with the Form 940 for tax year 2026, due Monday, February 1, 2027 (January 31, 2027 falls on a Sunday, so the deadline rolls to the next business day).

With that caveat front and center, the DOL’s potential list projects the same two jurisdictions:

California: 1.5% base reduction (projected), which would make the effective rate 2.1%, or about $147 per employee. There is a wildcard on top of this, covered in the next section, that could push it higher.
US Virgin Islands: 4.8% reduction (projected), for an effective rate of 5.4%, or about $378 per employee. No surtax add-on is expected here.

Treat every one of those 2026 numbers as a pencil entry. They are the DOL’s best current read, and they track how the year has gone so far, but a state can still repay its loan before the November deadline and drop off the list entirely. Connecticut and New York did exactly that ahead of the 2025 cutoff. Do not budget the 2026 figures as if they were locked.

Why only California and the Virgin Islands?

The credit reduction has a specific trigger. A state has to carry an outstanding federal unemployment loan on January 1 for two consecutive years and still not have repaid it by November 10 of the second year. Miss that, and the reduction kicks in and escalates 0.3% per year.

Right now, California is the only US state that still owes on its COVID-era federal unemployment loan. That balance was roughly $20.9 billion as of early November 2025 and is projected to keep growing through 2026. The US Virgin Islands is the only territory in the same position, with advances outstanding on every January 1 going back to 2010. Everyone else either repaid or never borrowed, which is why the list has just two names.

California also carries a second, scarier-looking risk: the BCR add-on. BCR stands for Benefit Cost Rate, an extra surtax that can apply once a state has been in credit reduction status for five or more years. For 2026 the projected BCR add-on for California is 3.8%, which is where the alarming “up to 5.3%” headline comes from (1.5% base plus 3.8%).

What employers miss: states can apply to waive the BCR add-on, and California has a track record of getting the waiver. It did for 2025, which is why the reduction landed at 1.2% instead of something much higher. The 2026 waiver application is due by July 1, 2026. If California gets it again, the reduction stays at the projected 1.5% base rather than jumping to 5.3%. So do not panic over the top-line number; watch whether the waiver goes through.

How to calculate and report your credit reduction

The math is short. Take each employee’s FUTA taxable wages, capped at the $7,000 wage base, and multiply by the state’s reduction rate. That is the extra amount on top of your normal 0.6%.

Start from the baseline. For one employee earning at least $7,000:

Normal net FUTA: $7,000 × 0.6% = $42

Now add California’s final 2025 reduction of 1.2%:

Extra from the reduction: $7,000 × 1.2% = $84
Total FUTA for that employee: $42 + $84 = $126

That is the effective 1.8% rate ($7,000 × 1.8% = $126) arrived at the long way. Run it for a five-person California team where everyone clears $7,000 and you are at $630 for the year instead of $210. The extra $84 a head is the credit reduction, plain and simple.

For the US Virgin Islands at 4.5%, the add-on is $7,000 × 4.5% = $315, on top of the $42, for $357 per employee.

Reporting it happens on Schedule A of Form 940. For each credit reduction state where you paid wages, you enter the FUTA taxable wages, multiply by that state’s reduction rate, and Schedule A totals the extra tax. That total carries to Form 940 line 11, then flows into your total FUTA liability. Multi-state employers list each affected state separately on the same Schedule A.

How to budget for it and model it before the bill lands

The credit reduction is an accrual problem more than a rate problem. The extra tax is small per head, but it only applies to the first $7,000 each employee earns, and it does not become official until November. Wait for the Form 940 to find out, and you have already spent the year under-accruing.

Two things make the modeling accurate. First, use the effective rate, not the base 0.6%: 1.8% for California’s 2025 filing, or the projected 2.1% if you want to stress-test 2026. Second, track each employee’s FUTA year-to-date wages so the $7,000 cap truncates on the exact dollar, mid-paycheck, when a worker crosses it. Apply the higher rate to the wrong wage base and every number downstream is off.

This is the kind of per-employee bookkeeping WorkLogs44 is built to handle. Its per-payroll FUTA rate defaults to 0.006 and stays editable, so you can set the 1.8% effective rate for a California crew and model the higher bill now instead of in January. It tracks each person’s FUTA earnings against the $7,000 cap independently, decimal-precise, across all 50 states plus DC. You can also see how FUTA stacks with SUTA and the FICA match in the employer FICA match guide, or run the whole employer side with the calculator tools.

One more reason to model early: California’s number could still shift on the BCR waiver, and a state on the watch list can repay and disappear. Building the higher figure into your accruals now, then reconciling after the November determination, beats a surprise at filing time. For the state side of the same equation, see our guide on what SUTA tax is and how the rate is set.

Frequently Asked Questions

Which states have a FUTA credit reduction for 2025?

California, with a 1.2% reduction, and the US Virgin Islands, with a 4.5% reduction. These are final and were paid with the Form 940 due February 2, 2026.

Which states will have a FUTA credit reduction for 2026?

The DOL’s potential list projects California and the US Virgin Islands again. Nothing is final until the DOL’s determination after November 10, 2026, so treat the 2026 numbers as projections.

How much extra FUTA will a California employer pay for 2025?

Up to about $126 per employee. That is the effective 1.8% rate (0.6% plus the 1.2% reduction) applied to the $7,000 wage base, versus the usual $42.

When is the 2026 FUTA credit reduction finalized?

After November 10, 2026. Any extra tax is paid with the Form 940 for tax year 2026, which is due Monday, February 1, 2027, because January 31 falls on a Sunday.

What is the BCR add-on, and will California pay it?

The BCR add-on is a Benefit Cost Rate surtax, projected at 3.8% for California in 2026, that could push its reduction to about 5.3%. California can apply for a waiver by July 1 and received one for 2025.

How do I calculate the FUTA credit reduction?

Multiply each employee’s FUTA taxable wages, up to $7,000, by the state’s reduction rate. For California’s 2025 rate of 1.2%, that is $7,000 times 1.2%, or $84 extra per employee.

Where do I report the credit reduction on my tax return?

On Schedule A of Form 940. You enter the FUTA taxable wages for each affected state, multiply by the reduction rate, and carry the total to Form 940 line 11.

Why are only California and the Virgin Islands affected?

They are the only US state and territory carrying an unpaid federal unemployment loan across two consecutive January 1 dates. Every other state repaid or never borrowed.

Want to model the higher effective rate before the bill lands? Get WorkLogs44 and run FUTA, SUTA, and the FICA match for your whole team in one pass.