FUTA Tax Rates to Increase for Employers in California and the Virgin Islands in 2025

Employers in California and the Virgin Islands will face increased Federal Unemployment Tax Act (FUTA) tax rates in 2025 due to outstanding federal loan balances, the U.S. Department of Labor (DOL) announced on January 12, 2026. These rates will be due for payment on or before January 31, 2026.

Increased FUTA Rates for 2025

Normally, employers can claim a 5.4% credit against the 6.0% FUTA tax rate, resulting in a net rate of 0.6% on the first $7,000 of wages paid to each employee. But, this credit will be reduced for employers in California and the Virgin Islands.

• California: The FUTA credit will be reduced from 5.4% to 4.2%, resulting in a FUTA tax rate of 1.8%. This represents a significant increase compared to the standard 0.6% rate.
• Virgin Islands: The FUTA credit will be reduced from 5.4% to 0.9%, resulting in a FUTA tax rate of 5.1%.

According to the DOL, employers in California will pay approximately three times more in FUTA tax than employers in other states, while those in the Virgin Islands will pay more than eight times more.

Background: FUTA and State Loans

The FUTA tax funds the Federal Unemployment Trust Fund, which provides assistance to states for unemployment benefits. States may borrow from this fund if they lack sufficient resources to meet benefit obligations.

California began borrowing money from the federal government in June 2020 due to the COVID-19 crisis. As of January 2026, California’s loan balance is expected to reach approximately $21.3 billion by the end of 2027.

Future Outlook

The FUTA credit reductions will continue and potentially increase, each year until the outstanding loan balances are repaid. The DOL will announce any further credit reduction states after the November 10 deadline each year. The Unemployment Insurance Committee (UWC) is currently consulting with business associations and states to explore options for addressing these solvency issues.