Late last year, California employers received a measure of unemployment insurance tax relief when the U.S. Department of Labor approved the state’s application for a benefit cost ratio (BCR) reduction waiver. However, even with the reduction, the federal unemployment tax burden in California remains substantial, and the road ahead is uncertain.

Under the Federal Unemployment Tax Act, employers pay a 6% federal unemployment tax on the first $7,000 of each employee’s wages. In most states, employers receive a 5.4% FUTA credit, bringing the effective tax rate down to just 0.6%—or $42 per employee. That credit, however, is contingent on a state maintaining good standing with regard to federal unemployment insurance regulations, including repaying any federal loans used to cover unemployment benefits. When a state carries an outstanding federal loan balance into a new year, the FUTA credit is reduced by 0.3% for each consecutive year the loan remains unpaid.

With California now entering its fourth consecutive year of credit reductions, employers’ net FUTA tax rate for 2026 stands at 1.8%, which results in a total of $126 per employee. It should be noted that without the BCR waiver, California employers would have been looking at tax rate of 5.2%, resulting in a charge of $364 per employee.

Once a state finds itself in this position, it must continue to apply for a waiver every year until the federal loan is completely repaid. If California does not pay back the federal loan before Nov. 10, the 2027 tax rate will increase to 2.1%. If the waiver for 2027 is denied, California employers will be looking at a FUTA tax rate of 5.9%—or $413 per employee.

Increased FUTA costs affect every employer, but they tend to hit staffing firms extra hard. A staffing firm in California that places 500 employees this year faces a FUTA tax of $63,000—while an employer in Oregon will have a $21,000 tax bill for the same number of employees.

Another BCR waiver would mitigate the 2027 FUTA increase, but approval is not guaranteed. Therefore, it is in the best interest of California employers to push for a solution that leads to repayment of the federal loan as soon as possible. The rising cost of employment taxes in California will not stop until the federal loan is paid in full.