Good morning. If you run trucks and crews in California, there's a line on your January tax return that's quietly getting bigger — and you'll pay a full year of the increase in one hit. It isn't a rate your state set. It's a federal penalty for a loan Sacramento hasn't paid back.
Top story — California's unpaid unemployment loan lands on your Form 940
Federal unemployment tax (FUTA) is normally the tax nobody notices: 6.0% on the first $7,000 of each worker's wages, knocked down to an effective 0.6% — about $42 a year per employee — as long as your state's unemployment fund is square with the federal government (OnPay). California's isn't. The state borrowed from Washington to keep paying unemployment claims and still owes more than $19 billion — it sent the feds a $525 million interest payment due 30 September 2026 (UWC).
When a state carries that debt year after year, the feds claw back part of the FUTA credit — 0.3 points more each year — and bill every employer in the state for it. California's credit reduction was 1.2% for 2025 (an effective 1.8%, about $126 per worker on the return you filed this past January). For 2026 it's on track to step up to 1.5% — an effective 2.1%, about $147 per worker (HRLogics). Nothing is locked until the Labor Department checks balances on 10 November 2026, but with a $19-billion hole, the direction isn't in much doubt.
Quick hits
The bill is retroactive, and it's due in January. The extra isn't withheld through the year — it's assessed on all of 2026's wages and paid in one lump when you file Form 940 with Schedule A, due 2 February 2027 (31 January is a Sunday), or 10 February if every 2026 FUTA deposit was on time (OnPay). For a 25-person shop, that's roughly $3,675 at $147 a head versus about $1,050 in a clean state — most of it a surprise if you didn't set it aside.
One federal wildcard can multiply it. California is at the point where a Benefit Cost Rate (BCR) add-on can pile on top of the base reduction. The state got that add-on waived for 2025 and asked for another waiver by the 1 July deadline; the 2026 answer isn't in (UWC). With the waiver, figure ~$147 a worker; without it, payroll advisers have modeled a total reduction several times larger — into the $370–$410 per-worker range (UWC; Resourceful Finance Pro).
It's not just California — and not everyone who borrowed is stuck. The U.S. Virgin Islands has carried this for years; its 2026 reduction is headed to about 4.8%, roughly $378 a worker (Resourceful Finance Pro). But New York and Connecticut paid their loans off before the November 2025 deadline and dodged the 2025 hit — worth about $100 a worker (HRLogics). The penalty only sticks to states that don't repay.
The Tip — Accrue it now, per head, before January
Don't let this land cold. Take your California headcount, multiply by $147 (the on-track 2026 figure), and set that aside now as a 2026 expense — most of your crew clears the $7,000 wage cap by spring, so the full per-head amount applies to nearly everyone. Pad it if you want a cushion against the BCR add-on. If you run payroll in more than one state, make sure Schedule A (Form 940) is on your year-end checklist so the right states get flagged and you're not re-filing a 940-X in March. And after 10 November, check the Labor Department's final list before you cut the check — the number is confirmed then, not before.
Tool watch — [Not sponsored]
The authoritative list is free and federal: the DOL "FUTA Credit Reduction" page (search "DOL FUTA credit reduction states"), which posts the confirmed states and rates in late November, and IRS Schedule A (Form 940), which does the per-state math for you. Read the DOL page before your January filing so you're working off the confirmed reduction, not a payroll-firm estimate — ours included. We name no payroll processor here, on purpose.
That's the callout. See you next time.
The Callout — the business brief for the trades. We label every commercial placement: [Sponsor], [Affiliate], or [Not sponsored]. Today's Tool watch is our own honest read — no one paid for it, and the only things named are free federal resources. 231J Ramparts Road, Te Anau 9600, New Zealand · Unsubscribe anytime. Nothing in The Callout is tax, legal or financial advice. What your shop owes, and how to book it, is a call for you and your own accountant or payroll provider. The 2026 credit-reduction list is not final until the U.S. Department of Labor confirms it after 10 November 2026.
Sources: