California employers avoided a drastic increase in their federal unemployment tax rate for 2026 when the U.S. Department of Labor granted the state’s application for a benefit cost ratio (BCR) reduction waiver earlier this month. However, this does not mean that California employers are out of the woods yet, as it is difficult to see how California can pay off its federal unemployment loans of almost $21 billion anytime soon.
Under federal law, employers are charged a 6% tax rate on the $7,000 tax base per employee. When a state is in good standing with the federal unemployment insurance regulations, employers in the state receive a credit of 5.4% (“FUTA credit”), thereby reducing the rate to 0.6%—meaning that employers pay $42 in federal unemployment taxes for each employee. However, if a state falls out of good standing, the FUTA credit is reduced by 0.3% each year, and FUTA credit reductions continue until the federal loans are paid back.
Next year will mark the fourth consecutive year California’s FUTA credit is reduced. This means that California employers’ federal unemployment tax rate now sits at 1.8%, which will result in California employers paying $126 per employee in federal unemployment taxes. Given the amount of the state’s outstanding federal loans, it could have been much worse. If DOL did not grant a waiver to the state, California employers would have seen their federal UI tax rate increase to 5.2%, resulting in a charge of $364 per employee.
If California does not pay off its federal loans before Nov. 10, 2026, employers will see the FUTA credit rate reduced by another 0.3%, which would raise their tax rate to 2.1% for 2027, resulting in a tax of $147 per employee. Also, the state would have to apply again for a BCR reduction waiver, and there is no guarantee California would receive it again, especially if it does not take steps to show it is trying to pay off the loans.
New York and Connecticut both paid off their outstanding federal UI loans this year to restore the original FUTA credit to employers. California businesses, organized labor, and legislators must get together to draft a plan that pays off these loans, or the state’s economy will continue to feel the effects of this increased tax on employment.