General information, not tax advice for your specific situation. Work with your CPA before filing.

If you run a California company and looked at your January 2026 payroll register, the employer-tax line got bigger. Not catastrophically, but enough that a founder doing monthly burn modeling will notice a real number. The instinct is to blame the latest high-profile bill, which right now is AB 1, the wildfire insurance reform Governor Newsom signed last October. AB 1 has nothing to do with your payroll. The actual drivers are three quieter changes that all landed at the same time.

What You Are Actually Seeing on the 2026 Pay Run

For a $175,000 salaried employee paid semi-monthly, the employer portion of payroll tax in 2025 ran almost exactly 7.65% once the $7,000 SUI wage base was exhausted in the first pay period of the year. In 2026, that same employee shows an incremental $100 to $150 per period above the FICA line for the first two quarters, then settles back down. Multiply that across a team of twenty and you are looking at $15,000 to $20,000 in additional employer taxes that were not in last year's model.

None of it is AB 1. Here is what actually changed.

Driver 1: The FUTA Credit Reduction Got Bigger

Federal Unemployment Tax (FUTA) is normally 6.0% on the first $7,000 per employee, with a 5.4% credit for states in good standing, leaving employers paying 0.6%, or $42 per employee per year. California is not in good standing. The state's UI trust fund has been in federal loan balance since the pandemic, and according to the EDD's January 2026 UI Fund Forecast, the outstanding loan is projected to reach roughly $21.3 billion by the end of 2027.

When a state carries a UI loan balance for multiple consecutive Januarys, the Department of Labor reduces the FUTA credit by 0.3% each year. California is now in its fourth year of reductions. For the 2025 tax year (which employers reconcile on the Form 940 filed in January 2026), the credit reduction is 1.2%, making the effective FUTA rate 1.8% on the first $7,000. That is up to $126 per employee, or $84 more than in a non-credit-reduction state.

For the 2026 tax year, unless California makes material repayment progress before the November 10, 2026 benchmark date, the credit reduction steps up another 0.3% to 1.5%. That pushes the per-employee cost to $147. The IRS Schedule A (Form 940) carries this adjustment, and it shows up as a Q4 true-up, not a monthly hit.

Net effect for a 20-person startup: about $2,520 extra on the 2025 Form 940 filed this quarter, and a projected $2,940 on the 2026 filing next January. Small per employee, meaningful over a cap table's worth of heads.

Driver 2: Schedule F+ Is the 2026 SUI Rate Schedule

California's SUI wage base remains $7,000 per employee, per year. What changed in 2026 is the rate schedule. The EDD moved to Schedule F+, which is Schedule F plus a 15% emergency surcharge rounded to the nearest tenth. Under Schedule F+, experience-rated employer rates run from 1.5% to 6.2%.

For most venture-backed startups, the practical impact is in the new-employer regime. If your company has been paying California payroll for less than three years, your UI rate is still the new-employer rate of 3.4%. That rate is not changing. But as soon as you graduate to experience rating, your assigned rate is pulled from Schedule F+, and most growth-stage employers with a clean claims history land in the 2% to 3% range on Schedule F+ versus the 1.5% to 2.5% range they might have seen on the old Schedule F.

The Employment Training Tax (ETT) remains 0.1% on the same $7,000 base. Together that caps employer UI plus ETT exposure at roughly $245 per employee per year under the new-employer rate.

Every California employer should pull their DE 2088 Notice of Contribution Rates for 2026 and confirm the exact rate assigned. If you are a new entity spun out of a parent company, or you acquired another firm's payroll in 2025, your rate can be different from what you assume.

Driver 3: SDI Has No Wage Cap, and It Just Went Up Again

State Disability Insurance is technically an employee withholding, not an employer tax, but it shows up on every pay stub and every compensation conversation, so founders need to see it clearly.

Senate Bill 951 removed the SDI taxable wage ceiling effective January 1, 2024. Before that change, SDI stopped once an employee hit the annual wage cap, which in 2023 was $153,164. For high earners, SDI used to disappear by April or May. Now it applies to every dollar of wages, all year.

For 2026, the SDI rate moved from 1.2% to 1.3%. On a $400,000 founder salary, that is $5,200 in SDI withholding for the year versus roughly $1,840 under the pre-2024 cap. The employer does not pay this, but the employer does explain it during comp reviews and offer-letter conversations, which is where the founder-to-founder conversation actually happens.

What About AB 1?

AB 1 (Connolly), Chapter 472 of the Statutes of 2025, is real, signed, and in effect. It is a residential property insurance and wildfire risk bill that directs the California Department of Insurance to evaluate, by January 1, 2030, whether to update its regulations to recognize additional building hardening and community-level wildfire mitigation in rate setting. That is it. The bill has no payroll, employment, or business-tax provisions. If a payroll provider or consultant cited AB 1 as the reason for a 2026 employer-tax increase, they got the bill wrong.

Where AB 1 could matter to a startup is on the HR side. If your team lives in fire-zone zip codes, home insurance availability and pricing is a compensation conversation, and the Sustainable Insurance Strategy that AB 1 reinforces will gradually reshape that market over the 2026 through 2030 window. That is a retention and comp-package consideration, not a payroll tax one.

The Real Per-Employee 2026 Math

For an existing California employer with three or more years of payroll history, on Schedule F+ at a representative 2.5% UI rate, here is the stacked employer side on the first $7,000 of wages for one employee:

• FUTA after the 1.5% projected credit reduction: 2.1%, or $147

• SUI at 2.5% Schedule F+: $175

• ETT at 0.1%: $7

• Employer FICA on the same $7,000: $535.50

That is $864.50 on the first $7,000, versus roughly $810 in 2025 and about $770 before the most recent FUTA reduction step. After the $7,000 is exhausted, the employer side drops back to pure FICA (6.2% Social Security up to the annual wage base, then 1.45% Medicare on everything above) for the rest of the year.

For a new employer paying the 3.4% new-employer UI rate, the first-$7,000 stack is $147 plus $238 plus $7 plus $535.50, or $927.50 per employee.

How to Plan for This

Three concrete moves.

First, rebuild your 2026 employer-tax model in the hiring plan. Most SaaS startups budget employer payroll tax as a flat percentage of gross comp, which works fine for FICA but badly under-models California. Build it as two layers: a per-employee flat amount for UI, ETT, and FUTA on the first $7,000, plus FICA on gross wages. Your CFO stack (Rippling, Gusto, Deel, JustWorks) can generally export this detail if you ask for it.

Second, accrue for the FUTA true-up. The credit reduction shows up on the Q4 Form 940 reconciliation, not evenly through the year, and founders who only watch monthly P&L get surprised in January. Book the accrual monthly so the January hit is not a cash shock.

Third, read your DE 2088 for 2026 carefully. If you received an unexpected experience rating, particularly one that moved against you, respond within the 60-day protest window. California's process is administrative and narrow, but founders miss the window routinely.

Looking Ahead to 2027

California's UI trust fund is not repaying the federal loan fast enough to stop the FUTA step-ups. The EDD's January 2026 forecast has the loan balance still north of $20 billion at the end of 2027. Absent a legislative fix, the FUTA credit will keep reducing by 0.3% per year, meaning 2027 tax-year employers in California could be looking at an effective FUTA rate of 2.4% on the first $7,000, or $168 per employee.

The honest answer for founders modeling 2027 headcount: budget another roughly $21 per employee per year in employer-tax creep, treat it as a structural cost of hiring in California, and keep an eye on which bills get traction in the 2026 session.

If you want to talk through how this applies to your company, book a call.

Anelya Grant is the founder of AG Accounting Inc. (anelya.net), an accounting firm serving tech startups and healthcare organizations. She is also co-founder of JustPaid.ai, an AI-powered billing and contract-to-cash platform for growing companies.