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November 20, 2023

A FUTA credit reduction to apply in three jurisdictions in 2023; New York lowers its employer interest assessment

  • California, New York and the Virgin Islands are subject to a federal unemployment insurance (FUTA) credit reduction in 2023 because they did not repay their FUTA loan balance by November 10, 2023. Connecticut and Illinois repaid their loan balances just prior to the November 10 cutoff.
  • Except for the Virgin Islands, states subject to the FUTA credit reduction (0.6% for 2023) will pay a net FUTA rate of 1.2%, rather than a net FUTA rate of 0.6%.
  • The additional FUTA tax owed due to the FUTA credit reduction will be shown on the 2023 Form 940, and the increase in FUTA tax is due on January 31, 2024.
  • New York employers will pay to the state a FUTA loan interest surcharge of 0.18% (down from 0.22%), or approximately $22.14 per employee. Virgin Islands employers continue to pay the territory a FUTA loan interest assessment of $25 per employee.

The Social Security Act requires a reduction in the FUTA tax credit when a jurisdiction has an outstanding federal unemployment insurance (UI) loan balance on January 1 of the second consecutive year and if the loan balance is not repaid in full by November 10 of that year. The reduction in the FUTA tax credit is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid.

Federal law discourages states from carrying their federal UI loan balances over several years by further reducing the FUTA credit beginning in the fifth year of the loan. This add-on to the FUTA credit reduction is referred to as the Benefit Cost Rate (BCR).The BCR penalty may be waived if the jurisdiction's governor submits an application to the US Secretary of Labor no later than July 1 of the penalty year and the jurisdiction takes no action (legislative, judicial or administrative) during the 12-month period ending September 30 that would reduce UI trust fund solvency during that same time period.

Should the BCR add-on be waived, as is normally the case if the conditions are met, another penalty, referred to as the "2.7 add-on," can apply if the jurisdiction's average unemployment insurance tax rate is inadequate. The 2.7 add-on penalty rate cannot be avoided or waived once activated.

COVID-19 and the FUTA credit reduction

UI benefit payouts in connection with COVID-19 were substantial in 2020 — 2021, placing an unprecedented strain on state UI trust funds. Twenty-two jurisdictions (California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Texas, Virginia, the Virgin Islands and West Virginia) requested federal UI loans when their UI trust fund balances grew insolvent from increased demand.

Approximately half of these twenty-two jurisdictions repaid their federal UI loan balances throughout 2020 and 2021. Many states used, or plan to use, federal COVID-19 stimulus money and/or state general funds to pay down their federal UI loans, thus sparing employers the added cost of debt financing.

Under federal law, if all or a portion of a federal UI loan is still outstanding after two years, employers are required to make payments toward the outstanding federal UI loan balance in the form of a FUTA credit reduction that increases the FUTA taxes employers pay. These extra FUTA contributions are used to pay the principal balance of the federal UI loan.

For the states that began borrowing in 2020, and still had an outstanding loan balance as of November 10, 2022, a FUTA credit reduction of 0.3% applied for 2022. An additional 0.3% is added for each year the loan balance continues to remain outstanding; accordingly, a credit reduction of 0.6% will apply for 2023.

The Virgin Islands was the only jurisdiction with an outstanding loan balance prior to 2020. Virgin Islands employers have been subject to a FUTA credit reduction since 2011. (EY Tax Alert 2021-2156.)

Interest assessments

Under the American Rescue Plan Act (ARPA) (P.L. 117-2), interest on federal UI loans received in 2020 began to accrue as of September 7, 2021 (extended from January 1, 2020, by the Families First Coronavirus Response Act (P.L. 116-127) and from March 16, 2021, under the Consolidated Appropriations Act, 2021 (P.L.116-260).

States that carry a loan balance as of October 1 are required to pay interest on September 30 of the following year. States can impose additional UI taxes on employers to recover the interest accrued on their federal UI loan balances.

Historically, most states have passed this interest cost on to employers in the form of UI interest surcharges; however, most states that incurred federal interest charges in 2021 through 2023 have not required that employers bear this cost. (See U.S. Department of Labor Program Letter No. 14-21.) See EY Tax Alerts 2021-1997 and 2022-0033 for more information.

FUTA credit reduction outlook for 2023

The US Treasury Department shows that for 2023, a FUTA credit reduction applies to three jurisdictions (California, New York and the Virgin Islands) because they failed to repay their outstanding loan balance by November 10, 2023. (U.S. Treasury website.)

2023 FUTA credit reduction states*


First year

of federal UI loan

Federal UI loan balance

as of 11-13-2023

2023 potential

FUTA credit

2023 potential BCR


Net 2023 potential FUTA rate(credit reduction + .06%)

Is there an employer surtax to repay interest on the federal UI loan?








New York







For 2023 the interest assessment is 0.18% (down from 0.22%), or approximately $22.14 per employee

Virgin Islands







$25 per employee applies

*U.S. Department of Labor, FUTA Credit Reductions


Contact Information
For additional information concerning this Alert, please contact:
Workforce Tax Services - Employment Tax Advisory Services
   • Kristie Lowery (
   • Kenneth Hausser (
   • Debera Salam (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor