California Employers Face Higher Payroll Taxes Due to Unpaid Federal Pandemic Loan

California businesses are seeing rising payroll taxes because the state has not repaid its federal pandemic unemployment loan, now exceeding $20 billion. Employers say this hidden cost is making it harder to hire, grow, and stay competitive.

Key Details:

California is the only state that has not repaid its federal unemployment insurance loan from the COVID-19 pandemic.
The Trump administration issued the loan in 2020 to cover massive unemployment claims. Other states repaid the loans, often using federal stimulus funds. California, however, diverted the money for other expenses.
As a result, federal law shifts the repayment burden to employers:
- 2025: $42 per employee
- 2027: $63 per employee
- Increases by $21 per employee each year until the debt is fully repaid
Currently, employers pay about $130 per employee in total payroll tax increases tied to unemployment.

Impact on Businesses:

Business leaders warn that higher payroll taxes discourage hiring and expansion, particularly for small businesses and nonprofits already struggling with inflation and high operating costs.
Rob Lapsley, president of the California Business Roundtable, called it “the greatest hidden tax” and warned the cost could exceed $400 per employee if the state does not act.

State Response:

Gov. Gavin Newsom previously attempted to allocate funds toward the loan, but legislative leaders opted not to pay down the principal.
State officials acknowledge structural problems in California’s unemployment insurance system and stress the need for reforms that balance business concerns with worker protections.
- Senate President Pro Tem Monique Limón: Focus on small business support while protecting workers
- Assembly Speaker Robert Rivas: Long-term system fixes needed, compromise with labor and business groups

Bottom Line:

Until California repays the federal loan, employers will continue to shoulder rising payroll tax costs, effectively acting as a quiet tax on jobs. Many business leaders urge the state to use available federal stimulus funds to reduce the debt and relieve this burden.

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