What is a credit reduction state?

A credit reduction state is a state that hasn't repaid money it borrowed from the federal government to pay unemployment benefits. These states are determined by the Department of Labor. If an employer pays wages that are subject to the unemployment tax laws of a credit reduction state, your credit against federal unemployment (FUTA) tax will be reduced based on the credit reduction rate assigned to your state.

For the 2025 tax year, the following are considered credit reduction states:

• California
• U.S. Virgin Islands