FUTA Credit Reduction Hits Harder in 2025: Here’s What Small Businesses Need to Know

The CA spending spree on unemployment benefits during and after the COVID pandemic is catching up to us, and unfortunately, small businesses are footing the bill.

How? Through something called the FUTA Credit Reduction, which quietly increases your payroll tax liability if you're operating in a state (like California) that borrowed federal funds for unemployment and hasn’t paid its loan back.

Let’s break this down.

What Is FUTA?

FUTA stands for Federal Unemployment Tax Act. It funds unemployment insurance at the federal level. Here's how it works under normal conditions:

• The FUTA tax rate is 6.0% on the first $7,000 of each employee’s wages.

• Employers typically receive a 5.4% credit, reducing the effective tax rate to 0.6%.

But here’s the kicker…

What’s a FUTA Credit Reduction?

If a state fails to repay its federal unemployment loan by November 10, the FUTA credit gets reduced progressively by .3% each year until the loan is paid back. This affects every employer through an increase in the federal tax per employee.

California, still carrying debt from its 2020–2021 unemployment borrowing, hasn’t paid off its loan. That means California employers will face a 1.2% credit reduction in 2025, an increase of .3% from 2024.

Effective FUTA Rate for 2025: 1.8% (That’s 0.6% + 1.2%)

How Much More Will You Pay?

Let’s break it down with an example:

• Employee earns $7,000 or more in the year

• FUTA tax = $7,000 × 1.8% = $126 per employee

• That’s $84 more per employee than the standard rate!

If you have 20 full-time employees, that’s an additional $1,680 out of your pocket in 2025 alone.

What Can You Do?

This isn’t a tax you can avoid, but you can prepare:

• Budget accordingly: Estimate your added cost by multiplying the number of 2025 employees by $84.

• Stay updated: Infinium HR will monitor all updates and provide any IRS or state guidance as soon as it’s available.

• Plan payroll timing: FUTA is typically paid annually in December, so plan your cash flow now.

Final Notes

Unfortunately, the state of California has opted not to pay off its federal unemployment debt, leaving small businesses like yours to absorb the cost. Frustrating? Absolutely. But at least now you can plan for it.

At Infinium HR, we’re keeping our clients informed and prepared. If you have questions or need assistance estimating your costs, we’re here to help.