California Business Owners Hit with Surprise Payroll Taxes Due to Unpaid Federal Loan

California business owners were blindsided by unexpected payroll taxes after Governor Gavin Newsom and Democratic legislators failed to repay a $20 billion federal loan on time.

The federal loan, meant to support unemployment costs during the pandemic, was not included in the state’s budget repayment plans. Consequently, the financial burden was shifted to business owners, already struggling under California’s high tax rates. Many of these businesses had faced forced closures during the pandemic, with numerous small enterprises unable to recover.

The penalty imposed on businesses includes an additional $21 per employee in payroll taxes, effective immediately. This amount will rise to $42 per employee in 2026, $63 in 2027, and will increase annually by $21 until the loan is fully repaid.

We just ran payroll. The payroll taxes were 2K higher than calculated. We called the payroll company. They explained (in summary) that California has a budget shortfall, and the federal government wants money back that it lent California for UI that it "lost." They are making up…

— Chef Andrew Gruel (@ChefGruel) November 20, 2024

Chef Andrew Gruel shared his frustration, stating:

“We just ran payroll. The payroll taxes were $2K higher than calculated. We called the payroll company. They explained…California has a budget shortfall, and the federal government wants money back that it lent California for UI that it ‘lost.’”

According to KCRA, California paid over $200 billion in unemployment benefits during the pandemic, with more than $32 billion linked to fraud. Despite receiving $27 billion in federal stimulus funds, state leaders opted to allocate those funds elsewhere, even as they claimed a $100 billion budget surplus.

California is one of only two states—alongside New York—that failed to repay its federal unemployment loan within the required two years, triggering federal payroll tax penalties for employers.

Earlier this year, controversy erupted when California’s Democratic state senators passed a bill granting illegal immigrants $150,000 interest-free home mortgage loans. However, the California Department of Finance confirmed the program was unfunded following the June budget agreement. Governor Newsom eventually vetoed the bill due to the lack of available funds.

This new payroll tax burden underscores what critics describe as deliberate financial mismanagement by state leaders, leaving California’s business owners to shoulder the cost of the unpaid federal loan.