11/19/25
News
FUTA Credit Reduction Raises 2025 Unemployment Tax Costs for California and U.S. Virgin Islands
3 Min Read
Key Takeaways
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California will be assessed a general Federal Unemployment Tax Act Credit reduction of 1.2% on wages paid to employees for work attributed to this state. The reduction will amount to an effective federal unemployment tax rate of 1.8% or up to $126 for each employee on the federal unemployment unemployment-taxable wage base of $7,000. The Virgin Islands will also receive a credit reduction, resulting in an effective federal tax rate of 5.1% or up to $357 applied to the same base.
This action will impact all staffing firms, professional employer organizations, and any business with employees working within California. Our Staffing Practice leaders have analyzed the change, explained the details, and outlined the implications for other states.
Impact of the reduction on California FUTA rate
The FUTA credit reduction will increase the federal unemployment tax for every California employee, potentially leading to significant tax exposure for staffing firms that have placed employees in California or large companies. The FUTA tax increase will continue every year until California repays its federal unemployment insurance loan.
Here is a more detailed breakdown of just how expensive this could be:
- Standard net FUTA rate: 0.6%
- Effective California 2025 FUTA rate: 1.8% (factoring in 1.2% credit reduction, which increases tax)
- 1.2% reduction is applied to the first $7,000 of wages per employee
- Staffing firms, PEOs, and business owners with operations in California should expect to pay $84 more per employee for 2025
At $84 per employee, this could result in substantial federal tax exposure, with the amount due on Form 940 by February 2, 2026.
Magnified impact on staffing firms
With large numbers of W-2 employees and high turnover, staffing firms may be severely impacted by this action. The extent of the impact will depend on the size of your California workforce, but it is something that staffing firms need to consider for the future.
- Expect $84 more per employee in FUTA taxes for 2025, due early 2026
- High turnover could amplify the cost impact
- Monitor California’s loan status; potential increases may occur in the future
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Authors
MATTHEW MUNN
Partner, UHY LLP Managing Director, UHY Advisors
Matt Munn has over 30 years of experience in public accounting and is an active member of the Tax Practice and leader of the Retirement Plan and Employee Benefits Services Group. He’s also a leading member of the firm’s National Professional Employer Organizations Practice, National Staffing Practice and National Transaction Services Practice.
JERRY GRADY
Partner, UHY LLP Managing Director, UHY Advisors
Jerry Grady has over 35 years in public accounting and he is the leader of the National Staffing Practice. He manages a team of professionals devoted to providing financial, tax, and business consulting services. He helps companies identify tax savings, improve operating efficiencies, and increase profits, as well as assists clients with corporate growth and business management strategies.