FUTA credit reduction
A FUTA credit reduction raises federal unemployment tax on employers in states that have carried a federal unemployment loan balance for consecutive years.
Employers normally pay FUTA at an effective 0.6 percent after a 5.4 percent credit for paying state unemployment tax. When a state borrows from the federal government to pay benefits and still has a balance after two consecutive January 1sts, the US Department of Labor reduces that credit by 0.3 percentage points per additional year with a balance, and every employer in the state pays the difference with the following January’s Form 940. The DOL publishes the affected states each November.
On a PEO invoice, FUTA is usually bundled into an employer-tax line, so a credit reduction can raise your bill without any change you made. Ask how the invoice handles a credit reduction: whether it is passed through at cost when announced, reconciled after year end, or absorbed into a marked-up tax rate. If you have employees in a state that has recently carried a loan balance, get the treatment in writing before signing.