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There’s an important update regarding the Federal Unemployment Tax Act (FUTA) that employers need to be aware of. This year, businesses in California (CA) are required to pay $84 more per employee, bringing the total FUTA tax to $126 per employee.
Here’s what’s driving the increase and what it means for your business.
Why Is California Paying a FUTA Penalty?
California previously borrowed funds from the federal government to cover unemployment benefits during periods of high claims. When those loans are not repaid within the federally required timeframe, the state becomes subject to a credit reduction.
That credit reduction increases the amount employers must pay in FUTA tax. While many states resolved their balances, California did not meet the repayment requirements—triggering this additional cost for employers again this year.
How Much Extra Will This Cost?
Normally, FUTA tax is $42 per employee, calculated on the first $7,000 of each employee’s annual wages.
With the current credit reduction:
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Additional FUTA tax: $84 per employee
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Total FUTA tax: $126 per employee
Examples:
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5 employees → 5 × $84 = $420 extra
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100 employees → 100 × $84 = $8,400 extra
If an employee earned less than $7,000 during the year, the FUTA tax for that employee will be proportionally lower.
What Is FUTA Tax?
FUTA stands for the Federal Unemployment Tax Act. It’s an employer-paid tax that helps fund state unemployment insurance programs. These funds support workers who lose their jobs through no fault of their own.
Employers pay FUTA annually, and it is separate from state unemployment taxes.
Does This Happen Every Year?
While FUTA tax itself is an annual obligation, the additional $84 per employee is not guaranteed every year. This increase only applies when a state has outstanding federal unemployment loans that trigger a credit reduction.
Unfortunately, California remains subject to this penalty again this year, making it important for employers to account for the higher cost in their payroll and year-end planning.
Bottom Line
If you employ workers in California, plan for a $126 FUTA tax per employee this year instead of the standard $42.
Budgeting for this increase now helps avoid surprises and ensures continued payroll tax compliance.
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