Last updated: Nov 24, 2025, 9:59 AM
Due to the rise of unemployment requests stemming from the COVID-19 pandemic, the federal government is applying FUTA credit reductions to some states.
If a state doesn't have enough funds to cover their unemployment benefit claims, that state will borrow from the federal government. If the state is not able to pay back those borrowed funds by a certain date, the federal government will apply a FUTA credit reduction directly to businesses. Due to the amount of unemployment requests during the COVID-19 pandemic, certain states did borrow from the federal government and are finding themselves unable to pay back.
Businesses in states that were unable to repay the federal government for unemployment benefit claims related to COVID-19 should expect to see a FUTA credit reduction. A reduction in the usual credit against the full FUTA tax rate means that employers paying wages subject to unemployment insurance (UI) tax in those states will owe a greater amount of tax. The only state involved in FUTA credit reductions for 2026 is California. Learn more by reading the US Department of Labor FUTA Credit Reductions website.
Your business should prepare for an increased variance amount in January 2026 if you are operating in California. Any increased FUTA tax liability due to a credit reduction is considered incurred in Q4 and is due by January 31st of the following year. Toast Payroll will debit for the FUTA credit reduction in mid-January to align with your of 2025. This will result in a higher quarterly variance that can be seen in the Reconciliation recap of that tax package (see step 2 of ).