Last November, the U.S. Department of Labor confirmed what multi-state employers had been watching closely: only two jurisdictions would face FUTA credit reductions for 2025. Connecticut and New York both managed to repay their federal unemployment loans before the November 10 deadline, avoiding the additional tax burden entirely. Their employers will save an estimated $100 per employee this year as a result.
Here's what that meant in real dollars:
|
State/Territory |
Credit Reduction |
Total FUTA Rate 2025 |
Cost Per Employee |
|
California |
1.2% |
1.8% |
$126 |
|
U.S. Virgin Islands |
4.5% |
5.1% |
$357 |
If you have even 100 employees in California, that's an extra $8,400 in federal unemployment taxes compared to what you'd pay in a state without credit reductions. For larger employers, the numbers add up quickly.
The challenge for California employers goes beyond 2025. The state currently carries an estimated $21 billion in outstanding federal loan balance, and while they successfully obtained a Benefit Cost Rate (BCR) Add-On waiver last year—preventing what would have been the highest FUTA rate increase in program history—that waiver only bought them time.
California now faces a critical November 10, 2026 deadline. If the state doesn't make meaningful repayment progress before then, employers should prepare for a credit reduction increase to 1.5% for the 2026 tax year. That would push the cost per employee to $147—a 17% increase from 2025. And if the BCR Add-On waiver doesn't get renewed, the rates could climb even higher.
For California employers doing 2026 budget planning, this creates real uncertainty. You know your baseline FUTA cost is $126 per employee based on last year's credit reduction, but you won't know if it's going up to $147 or higher until late November—after you've already made three quarterly deposits. The best approach is to monitor the state's loan repayment progress throughout the year and build flexibility into your budget assumptions.
The Department of Labor's FUTA Credit Reductions page updates quarterly with current loan balances. Check it regularly, especially as you approach the fall, to see whether California is making progress or falling further behind.
FUTA credit reductions aren't the only tax increase hitting employers in 2026. If you received your state unemployment tax rate notice in December or January and saw an unexpectedly high rate, there's a good chance you're dealing with a penalty rate assignment.
Most states impose penalty rates when employers have outstanding contribution reports or unpaid contribution amounts from prior quarters. The penalties vary dramatically by state. Florida assigns delinquent employers the maximum rate of 5.40%, while Pennsylvania adds a 3.00% penalty rate on top of your normal rate. Either way, it's expensive.
The frustrating part is that many employers don't discover these issues until the rate notice arrives—and by then, the deadline to resolve the underlying delinquency may have already passed. However, you still have options if you act quickly.
If you're within the protest deadline (typically 30 days from the notice date), file immediately to maintain your appeal rights with the state agency. Even if the underlying issue can't be fixed retroactively, the protest preserves your ability to negotiate or demonstrate compliance efforts.
If the protest deadline has passed, don't assume you're stuck with the penalty rate for the entire year. Some states allow mid-year corrections if you can resolve the delinquency and demonstrate it won't recur. Contact your state unemployment agency directly to understand your options.
To prevent this from happening in 2027, establish quarterly compliance reviews now. Set up automated reminders for state filing deadlines, verify all quarterly reports are submitted on time, and maintain documentation of every filing and payment. The cost of prevention is minimal compared to a year of penalty rates.
Verify Your 2025 Form 940 Accuracy
If you have employees in California or the Virgin Islands, pull out the Form 940 you filed in January and verify that Schedule A correctly applied the credit reductions. California employers should see a 1.2% credit reduction applied to FUTA taxable wages; Virgin Islands employers should see 4.5%.
If you discover errors—whether you overpaid or underpaid—file an amended return using Form 940-X. Include any additional tax due with the amended return, or claim your refund if you overpaid. The IRS processes amended returns relatively quickly, and fixing errors now prevents complications during audits.
Update Your 2026 Budget Models
Your 2026 state unemployment tax rate notices should have arrived by now. Use those actual rates to update your payroll tax accruals for the rest of the year, paying particular attention to states with significant wage base increases.
Washington's wage base jumped to $78,200 for 2026—one of the highest in the nation. Oregon is at $56,700, New Jersey at $44,800, and Maryland saw a substantial increase to $8,500. If you have higher-earning employees in these states, the wage base increases alone can add thousands to your unemployment tax bill, even if your tax rate remained flat.
Model the impact on different employee wage levels and adjust your quarterly payroll tax accruals accordingly. The last thing you want is to discover a five-figure budget variance in Q4 because you were using 2025 wage bases all year.
For California employers, the question isn't whether to budget for elevated FUTA costs in 2027—it's how much elevation to expect. At minimum, you should plan for $126 per employee based on the current 1.2% credit reduction. If California doesn't make repayment progress by November 10, budget for $147 per employee (1.5% credit reduction). And if the BCR Add-On waiver doesn't get renewed, costs could climb even higher.
Virgin Islands employers should continue budgeting $357 per employee unless the territory makes unexpected repayment progress.
For employers in all other states, monitor the DOL's quarterly reports for any states showing new federal loan balances. Economic downturns can cause states to borrow from the federal trust fund, potentially creating new credit reduction states for future years.
The 2025 FUTA credit reductions are locked in—those costs are final. But 2026 remains uncertain, particularly for California employers who face a November deadline that will determine whether their federal unemployment taxes increase even further.
Organizations that verify their 2025 filing accuracy, address penalty rate assignments immediately, and update budget models based on actual 2026 rates position themselves for better cost control regardless of what happens with California's loan balance later this year. The key is staying proactive rather than reactive, monitoring developments quarterly, and building budget flexibility to accommodate potential increases.