FUTA credit reduction states for 2026: California faces 1.5% to an estimated 5.3%, the U.S. Virgin Islands 4.8%
Two jurisdictions are on the U.S. Department of Labor's list of potential FUTA credit reduction states for tax year 2026: California and the U.S. Virgin Islands. If a jurisdiction still has a federal unemployment loan balance at the beginning of November 10, 2026, employers there owe extra federal unemployment tax on the first $7,000 of each employee's 2026 wages: in California 1.5% ($105 per employee) if the benefit cost rate (BCR) add-on is waived, or an estimated 5.3% ($371 per employee) if it is not; in the U.S. Virgin Islands 4.8% ($336 per employee).
- Potential 2026 credit reduction states
- California and the U.S. Virgin Islands (DOL list dated January 15, 2026)
- California, base reduction
- 1.5% of FUTA wages
- California, with estimated BCR add-on
- 5.3% (1.5% + 3.8%)
- U.S. Virgin Islands
- 4.8%
- Date that decides it
- November 10, 2026 (loan balance on that date)
- FUTA wage base
- $7,000 per employee per year
- Extra tax per employee, California
- $105 at 1.5%; $371 at 5.3%
- 2025 result for comparison
- California 1.2% ($84), U.S. Virgin Islands 4.5% ($315)
Figures above were read from the U.S. Department of Labor (DOL) FUTA credit reduction files, the Federal Register notice of January 12, 2026, and IRS Form 940 materials on 2026-10-11. See sources.
The DOL's 2026 list
A state becomes a credit reduction state when it has an unpaid federal unemployment loan (a Title XII advance) on January 1 of two or more consecutive years and has not repaid it by November 10 of the year in question. The DOL's 2026 spreadsheet lists the two jurisdictions that had a balance on January 1, 2026 and adds an estimated rate for each piece of the reduction. The DOL page says the list is provided "because the final credit reduction for any given year is not determined until Nov. 10 of that year".
| Jurisdiction | Reduction for outstanding loan | Estimated 2.7 add-on | Estimated BCR add-on | Potential total |
|---|---|---|---|---|
| California | 1.5% | 0.0% | 3.8% | 5.3% |
| U.S. Virgin Islands | 4.8% | 0.0% | 0.0% | 4.8% |
No other state is on the 2026 list. Connecticut and New York were potential credit reduction states for 2025 but repaid their loans before November 10, 2025, according to the DOL's Federal Register notice for 2025.
What it costs per employee, with the arithmetic
FUTA is 6.0% of the first $7,000 paid to each employee in a calendar year (26 U.S.C. 3301 and 3306(b)(1)). Employers normally receive a credit of up to 5.4% for state unemployment tax paid, so the usual net rate is 0.6%, or $42 per employee. A credit reduction lowers that 5.4% credit, so the extra tax is the reduction rate times the FUTA wages of each employee, up to $7,000.
| Case | Credit reduction | Extra FUTA per employee | Total FUTA per employee |
|---|---|---|---|
| No credit reduction | 0% | $0 | 0.6% x $7,000 = $42 |
| California 2026, add-on waived | 1.5% | 0.015 x $7,000 = $105 | 2.1% x $7,000 = $147 |
| California 2026, estimated add-on applies | 5.3% | 0.053 x $7,000 = $371 | 5.9% x $7,000 = $413 |
| U.S. Virgin Islands 2026 (potential) | 4.8% | 0.048 x $7,000 = $336 | 5.4% x $7,000 = $378 |
| California 2025 (final) | 1.2% | 0.012 x $7,000 = $84 | 1.8% x $7,000 = $126 |
| U.S. Virgin Islands 2025 (final) | 4.5% | 0.045 x $7,000 = $315 | 5.1% x $7,000 = $357 |
For ten California employees who each earn $7,000 or more, the extra tax is $1,050 at 1.5% (10 x $105) or $3,710 at 5.3% (10 x $371). California's Employment Development Department states the 2025 reduction the same way: an extra $84 per employee for the 2025 tax year.
Why California's 2026 figure is a range
The base reduction grows by 0.3 percentage point for each consecutive year with a loan balance, which is why California moved from 1.2% for 2025 to 1.5% for 2026. Separately, from the fifth consecutive January 1 with a balance, federal law can add a benefit cost rate (BCR) add-on under 26 U.S.C. 3302(c)(2)(C). California began borrowing on June 3, 2020, according to the EDD, and the DOL's notice for 2025 counted five consecutive January 1 balances for the state.
The BCR add-on is replaced by the 2.7 add-on (estimated at 0.0% for California) if the Secretary of Labor finds, on or before November 10, that no state action taken in the 12 months ending September 30 has resulted or will result in a net decrease in the solvency of the state's unemployment system (26 U.S.C. 3302(c)(2) and (f)(2)(B)). The governor has to apply. The regulation at 20 CFR 606.26 says: "The Governor of the State shall make application addressed to the Secretary of Labor, no later than July 1 of a taxable year with respect to which a State requests waiver and substitution."
For 2025 this is what happened. The DOL's notice says "Both California and the U.S. Virgin Islands applied for a waiver of this additional credit reduction" and the agency found that each state qualified, so the final 2025 rates were the base rates alone: "Employers in California are subject to a FUTA credit reduction of 1.2 percent for 2025." For the U.S. Virgin Islands the notice states: "Employers in the U.S. Virgin Islands are subject to a FUTA credit reduction of 4.5 percent for 2025."
For 2026, the EDD's May 2026 Unemployment Insurance Fund Forecast assumes the BCR add-on is waived for tax year 2026 when it projects 2027 collections. That is the state's forecasting assumption, not a DOL decision. The same forecast projects California's federal loan balance at $22.0 billion at the end of 2026 and $21.4 billion at the end of 2027, a projection that leaves a balance outstanding through 2027.
2026 timeline
| Date | What happens | Source |
|---|---|---|
| January 1, 2026 | California and the U.S. Virgin Islands had loan balances for at least a second consecutive January 1 | DOL potential 2026 list |
| January 15, 2026 | Date on the DOL's potential 2026 credit reduction spreadsheet | DOL |
| July 1, 2026 | Deadline for a governor's application to waive the BCR add-on | 20 CFR 606.26(a) |
| September 30, 2026 | End of the 12-month period the solvency test looks at | 26 U.S.C. 3302(f)(2) |
| November 10, 2026 | A state with no loan balance at the beginning of this day avoids the reduction; the DOL decides waiver applications as of this date | 26 U.S.C. 3302(d)(3); 20 CFR 606.26(b) |
| After November 10, 2026 | The DOL announces the final credit reduction states; the notice for 2025 appeared in the Federal Register on January 12, 2026 | IRS; Federal Register |
| February 1, 2027 | Fourth-quarter FUTA, including any credit reduction, is due (deposited if more than $500); Form 940 for 2026 is due the same day, or February 10, 2027 if all FUTA tax was deposited when due | IRS draft 2026 Instructions for Form 940 |
The statute sets the November 10 test: "Paragraph (2) of subsection (c) shall not apply with respect to any State for the taxable year if (as of the beginning of November 10 of such year) there is no balance of advances referred to in such paragraph." The IRS describes the announcement timing this way: "DOL runs the loan program and announces any credit reduction states after the November 10 deadline each year."
How the reduction is reported and paid
The extra tax is figured on Schedule A (Form 940). Employers that paid wages subject to the unemployment law of a credit reduction state complete it even if they paid wages in only one state, enter the FUTA taxable wages paid in that state, multiply by the reduction rate, and carry the total to Form 940, line 11. Wages that were excluded from the state's unemployment tax are left out. The IRS example on the 2025 schedule: $21,000 of FUTA taxable wages in a state with a 0.012 rate produces a $252.00 credit reduction.
The IRS draft of the 2026 Schedule A repeats the DOL's January 1, 2026 list and shows only placeholders for the 2026 rates until the DOL's final announcement. On timing, the Form 940 instructions say: "In years when there are credit reduction states, you must include liabilities owed for credit reduction with your fourth quarter deposit."
Recent history of FUTA credit reductions
| Jurisdiction | 2022 | 2023 | 2024 | 2025 | 2026 (potential) |
|---|---|---|---|---|---|
| California | 0.3% | 0.6% | 0.9% | 1.2% | 1.5% to 5.3% |
| Connecticut | 0.3% | none | none | none | not on list |
| Illinois | 0.3% | none | none | none | not on list |
| New York | 0.3% | 0.6% | 0.9% | none | not on list |
| U.S. Virgin Islands | 3.6% | 3.9% | 4.2% | 4.5% | 4.8% |
What we could not confirm
- Whether California's governor applied by July 1, 2026 to waive the 2026 BCR add-on, and whether the U.S. Virgin Islands applied for any relief. We looked at the DOL FUTA credit reduction page, the Federal Register, the EDD's FUTA page and its May 2026 fund forecast, and found no public record either way. A DOL news release file from June 17, 2026 returned an HTTP 403 error to our reader, so we did not read it.
- The final 2026 rates. They are not set until the DOL's determination after November 10, 2026. The 3.8% BCR add-on is the DOL's preliminary estimate, and the DOL spreadsheet we read on 2026-10-11 is still dated January 15, 2026.
- Any later 2026 loan repayment by either jurisdiction. The EDD's May 2026 forecast is the latest official projection we found for California.
Questions
What states have a FUTA credit reduction for 2026?
What is the California FUTA credit reduction for 2026?
Is New York a FUTA credit reduction state for 2026?
When will the final 2026 credit reduction states be announced?
When is the extra tax paid?
This page is general information, not legal or tax advice. How the reduction applies depends on your facts and on the states where you pay wages.
Related: 2027 state unemployment (SUI) wage bases by state and registered agent service prices compared.
Sources
- DOL Employment and Training Administration, FUTA Credit Reductions - oui.doleta.gov, read 2026-10-11
- DOL, Potential 2026 FUTA Credit Reductions (spreadsheet dated January 15, 2026) - oui.doleta.gov, read 2026-10-11
- DOL, Actual FUTA Credit Reductions 2010-2025 (dated December 9, 2025) - oui.doleta.gov, read 2026-10-11
- DOL, Notice of the FUTA Credit Reductions Applicable for 2025, 91 FR 1198 (January 12, 2026) - Federal Register, read 2026-10-11
- 26 U.S.C. 3302, Credits against tax - govinfo.gov (U.S. Code, 2024 edition), read 2026-10-11
- 26 U.S.C. 3301, Rate of tax - govinfo.gov, read 2026-10-11
- 26 U.S.C. 3306, Definitions (the $7,000 wage base) - govinfo.gov, read 2026-10-11
- 20 CFR 606.26, Application for waiver and substitution - eCFR, read 2026-10-11
- IRS, FUTA credit reduction (page last reviewed September 8, 2026) - irs.gov, read 2026-10-11
- IRS, Instructions for Form 940 (2025) - irs.gov, read 2026-10-11
- IRS, Schedule A (Form 940) for 2025 and its instructions - irs.gov (PDF), read 2026-10-11
- IRS, early-release draft of Schedule A (Form 940) for 2026 - irs.gov (PDF, draft, not for filing), read 2026-10-11
- IRS, early-release draft of the Instructions for Form 940 (2026), dated September 22, 2026 - irs.gov (PDF, draft, not for filing), read 2026-10-11
- California EDD, Federal Unemployment Tax Act - edd.ca.gov, read 2026-10-11
- California EDD, May 2026 UI Fund Forecast - edd.ca.gov (PDF), read 2026-10-11
Source links are not affiliate links. This page is general information, not legal, tax or financial advice.
