Federal Unemployment Tax Act
For Wages Employers Paid in 2021
California employers fund regular Unemployment Insurance (UI) benefits through contributions to the state’s UI Trust Fund on behalf of each employee. They also pay Federal Unemployment Tax Act (FUTA) taxes to the federal government to help pay for:
- Administration of the UI program
- UI loans to insolvent states
- Federal extension benefits
Any additional employer FUTA contributions are used to repay outstanding funds owed for the federal UI loan that the State may have.
When a state has an outstanding loan balance on January 1 for two consecutive years and does not repay the full amount of its loan by November 10 of the second year, the state becomes what is known as a credit reduction state. The FUTA credit rate for employers within a credit reduction state will be reduced until the outstanding federal loan is repaid. This means that employers paying wages subject to UI will owe a greater amount of FUTA tax.
Current federal law provides employers with a 5.4 percent FUTA tax credit, and no FUTA tax credit reduction will occur in 2022 for wages paid to their workers in 2021. California does have an outstanding loan balance as of January 1, 2021, so future credit reductions are possible.
The IRS uses the FUTA recertification process to make sure the total taxable wages you claimed on the Employer’s Annual Federal Unemployment (FUTA) Tax Return (Form 940) or the federal Household Employment Taxes (Form 1040, Schedule H) were paid to the state. You must meet both the state and federal payroll tax requirements.
Refer to FUTA Credit Reduction on the IRS website for more information.
To report total taxable UI wages and pay any federal unemployment taxes, you must file reports and pay UI taxes with us, and file a Form 940 with the IRS. Generally, you can take a federal credit against your FUTA tax for the UI taxes you paid to California.
On an annual basis, the EDD and the IRS compare the amounts you reported on your IRS Form 940 to the Total Subject Wages (Line C) and UI Taxable Wages (Line D2) on your Quarterly Contribution Return and Report of Wages (DE 9) with us. If the amounts are not the same, you have an out-of-balance condition. If not corrected, you may receive an assessment from the IRS or us.
An out-of-balance condition can happen when we have not been notified of a change in your organization or Federal Employer Identification Number (FEIN). You can update your FEIN and make changes to your account online using e-Services for Business.
To request a FUTA recertification online:
- Go to Ask EDD.
- Select the Payroll Tax category.
- Select the FUTA Recertification sub-category.
- Select the FUTA Recertification topic.
- Select Continue and complete the necessary information.
If you have questions about your request, call our FUTA Recertification Unit at 1-916-654-8545.