Payroll · federal unemployment tax · 2026
FUTA credit reduction calculator.
Estimate your 2026 FUTA bill if your employees work in California or the Virgin Islands, using the Department of Labor's potential reductions until the final list is announced after November 10.
A planning estimate, not a tax return
The 2026 reductions are potential until the Department of Labor announces the final list after November 10. This tool applies the IRS and DOL rules to the numbers you enter. It is general information, not tax advice. Nothing you enter leaves your browser and nothing is stored.
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FUTA credit reduction for 2026: what it is and who is affected
FUTA is the federal unemployment tax. The IRS sets it at 6.0% on the first $7,000 of each employee's wages and normally gives employers a 5.4% credit for state unemployment tax paid, so most employers owe a net 0.6%, which is $42 per employee. When a state borrows from the federal unemployment trust fund and has not repaid by the deadline, the credit shrinks for every employer in that state. That shrinkage is the credit reduction, and it is added to the 0.6%.
As of October 20, 2026, the Department of Labor's file of potential 2026 reductions lists two jurisdictions: California and the Virgin Islands. The word potential matters. DOL says the final reduction for any year is not determined until November 10, and the IRS says DOL announces the credit reduction states after that deadline. A state that repays all its advances before November 10 is not reduced for the year. Treat every 2026 number on this page as a planning figure until DOL's announcement.
How the calculator works, variable by variable
- Employees and average wages. FUTA only taxes the first $7,000 of each employee's pay, so wages above $7,000 do not change the answer. The calculator multiplies the number of employees by the lesser of their wages and $7,000 to get FUTA taxable wages.
- Credit reduction rate. The percentage points removed from the 5.4% credit. The presets come from the DOL files; the custom field is for the final figure after DOL announces it.
- Result. Standard FUTA at 0.6% of taxable wages, the extra tax from the reduction, the total, and the cost per employee. Employers report the reduction on Schedule A of Form 940, entering the FUTA taxable wages paid in each credit reduction state.
Worked example (hypothetical): twelve employees in California
A California business has twelve employees who each earn $60,000. FUTA taxable wages are 12 × $7,000 = $84,000.00.
- No reduction: 0.6% of $84,000.00 is $504.00, or $42.00 per employee.
- The 2025 actual reduction of 1.2%: an extra $1,008.00, for a total of $1,512.00 ($126.00 per employee).
- The 2026 potential reduction of 5.3% (1.5% base plus the preliminary 3.8% BCR add-on): an extra $4,452.00, for a total of $4,956.00 ($413.00 per employee).
The jump comes from the add-ons that apply to a state after repeated years of outstanding advances. DOL's note on the potential file says each January 1 with an outstanding advance, after the second, adds 0.3%, that a third consecutive year brings the "2.7 add-on", and that a state passing five consecutive years is potentially subject to the benefit cost rate add-on. DOL also notes the BCR add-on can be waived and replaced by the 2.7 add-on, which is one reason the final number may differ from the estimate.
Edge cases and common mistakes
- Applying the reduction to all payroll. The reduction is multiplied by FUTA taxable wages in the credit reduction state, not total wages.
- Forgetting when it is due. The IRS says any increase in FUTA liability from the credit reduction is treated as incurred in the fourth quarter and is due by January 31 of the following year, so it is easy to miss in quarterly deposits.
- Assuming a late state tax payment changes nothing. The model assumes your state unemployment contributions were paid on time and in full. If they were not, the credit can be smaller than 5.4%, which this tool does not model.
History: which states have been reduced since 2022
The table is taken from the DOL's actual-reductions file for 2022 to 2025 and its potential file for 2026.
| Jurisdiction | 2022 (actual) | 2023 (actual) | 2024 (actual) | 2025 (actual) | 2026 (potential, DOL estimate) |
|---|---|---|---|---|---|
| California | 0.3% | 0.6% | 0.9% | 1.2% | 5.3% (1.5% reduction + 3.8% BCR add-on, preliminary) |
| Connecticut | 0.3% | — | — | — | — |
| Illinois | 0.3% | — | — | — | — |
| New York | 0.3% | 0.6% | 0.9% | — | — |
| Virgin Islands | 3.6% | 3.9% | 4.2% | 4.5% | 4.8% |
Who this is for, and what it does not cover
This page is for employers with employees in California or the Virgin Islands, payroll preparers building a year-end estimate, and anyone checking a payroll provider's Form 940 projection. It does not cover state unemployment tax (see the SUTA rate table), employers exempt from FUTA, or the avoidance, cap and waiver provisions DOL says some states can use to reduce their own reductions.
Frequently asked questions
What is the FUTA credit reduction?
It is a reduction in the 5.4% credit employers normally take against the 6.0% federal unemployment tax. It applies in states that have outstanding federal loans for unemployment benefits and have not repaid them in time. The employer's effective FUTA rate becomes 0.6% plus the reduction.
Which states have a FUTA credit reduction for 2026?
The Department of Labor's potential 2026 list shows California and the Virgin Islands. It is potential because the final reduction for a year is not determined until November 10. The IRS says DOL announces the credit reduction states after that deadline.
How do I calculate the FUTA credit reduction?
Multiply the FUTA taxable wages you paid in the credit reduction state by the reduction rate. FUTA taxable wages are the first $7,000 of each employee's pay. For example, twelve California employees at $7,000 or more each have $84,000 of taxable wages, and a 1.2% reduction adds $1,008.00.
When is the extra FUTA tax due?
The IRS says increased FUTA liability from a credit reduction is treated as incurred in the fourth quarter and is due by January 31 of the following year. You report it on Schedule A of Form 940.
Why is California's 2026 potential reduction 5.3%?
The DOL file adds a 1.5% reduction for the outstanding advance to a preliminary 3.8% add-on based on the benefit cost rate, which applies after five consecutive January 1s with an outstanding advance. DOL notes the value is a preliminary estimate based on estimated third and fourth quarter 2025 wages and contributions, and that the add-on can be waived and replaced by the 2.7 add-on.
Does the credit reduction apply to wages above $7,000?
No. It is multiplied by FUTA taxable wages, which are capped at $7,000 per employee, in the credit reduction state. Pay above that amount does not increase the reduction.
What do employers in other states pay?
The normal net FUTA rate of 0.6% on the first $7,000, which is $42 per employee, assuming state unemployment tax was paid on time and the full 5.4% credit is available.
Can a state avoid the credit reduction?
Yes, by repaying all of its federal advances before November 10 of the year. DOL also notes that regulations allow some states relief through avoidance, caps on reductions and fifth-year waivers; those cases are decided by DOL and the state, not by employers.
Sources
Retrieved October 20, 2026. Each link was fetched on that date. Figures on this page come from these pages and no others.
- U.S. Department of Labor, FUTA Credit Reductions — how the reduction works, and that the final reduction is not set until November 10
- DOL, Potential 2026 FUTA Credit Reductions (file dated January 15, 2026) — California and the Virgin Islands; the BCR add-on is a preliminary estimate
- DOL, Actual FUTA Credit Reductions 2010-2025 (file dated December 9, 2025) — the 2022 to 2025 history in the table
- IRS, FUTA credit reduction — 6.0% on the first $7,000, the 5.4% credit, Schedule A, and the January 31 due date