Businesses across California are now paying more on their payroll taxes to the federal government because of spending decisions the state's legislature and governor made within the last couple of years. The state failed to repay on time its $20 billion loan from the federal government that helped with California's unemployment costs during the pandemic. The state forced businesses to close during COVID-19, leaving many jobless and in need of unemployment pay. State officials have said California ended up paying more than $200 billion in benefits. More than $32 billion of was the subject of fraud, according to nationally recognized fraud experts. Officials for California's Employment Development Department have disputed this, stating the amount of fraud was $20 billion with $6 billion of it recovered. California is one of two states (the other New York), that did not pay back the loan with the stimulus money it had received from the federal government. California received $27 billion in stimulus, but state leaders opted to keep it and spend it on other items at a time when they boasted about the state's nearly $100 billion budget surplus. In 2023, the state faced a budget deficit in the tens of billions of dollars and then was met with the same hurdle in 2024.Since the state did not pay back the debt within two years, federal law requires the state's employers to step in and pay up. As of now, each employer, regardless of the number of employees they have and whether they are part or full-time, will pay an extra $21 dollars per employee on their payroll taxes. In 2026, the extra amount will increase to $42, in 2027 to $63, and increase another $21 per employee every year until it's paid off. Employers across the state within the last several weeks have received notices from their payroll companies, alerting them of their new costs as a result of the state's decisions. Some told KCRA 3 they were blindsided by the amount of money taken out of their bank accounts. "I feel like it's an email I would have normally dragged into my trash, but I clicked on it and it said we will be deducting this in early January of 2025," said Becca Kenyon Westfall, the owner of CycleLife, a cycling and fitness studio with locations in Sacramento, El Dorado Hills and Rocklin. She said with 32 employees, the costs amounted to $2,100 from her payroll. "That's definitely an amount I was not planning on paying," she said in an interview with KCRA 3. "This just feels like a gut punch after everything else COVID has done to us. It's frustrating." Chef Andrew Gruel, a restaurant owner based in Southern California with a popular social media presence, posted about his similar situation on X. "Our hours went down, but our payroll went up $2,000, and I said, 'that doesn't make any sense,'" Gruel told KCRA 3 in an interview. "Restaurants don't have thousands of dollars sitting around because we have perishable inventory." "If I knew there was $2,000 that was going to be taken out of our payroll, I wouldn't buy futures into some of my seafood. I would've kept more cash in the bank accounts because I always want that cash for emergencies," he said. "The state has never paid any money towards the principal, nor has it created any sort of credit or benefit for smaller businesses facing this significant federal tax hike," said McGeorge School of Law Professor and long-time California lobbyist, Chris Micheli. Micheli noted lawmakers and the governor first approved but then prevented a state tax credit from going into effect in 2023 that would have helped cover the costs for some employers. "Every employer, no matter the size or type of business, face this increase each and every year until that 21 billion is paid back, it’s all on the shoulders of the employers," Micheli said, noting even businesses that opened after the pandemic are subject to the higher taxes. "That amount of money is unfathomable, I wish they’d be a little more responsible with our tax dollars," Westfall said. "This has been an issue for many, many years," Gov. Gavin Newsom told reporters in Redding on Monday. He claimed he tried to put billions toward the debt, and blamed the legislature for taking the money out of the budget. "We'll continue to make the case with the legislature and the imperative and importance of paying down this," he said. "It’s an obligation we have, to pay it down. We just want to make sure we don’t do it on the backs of employers as it results to the payroll tax, obviously that's a point of concern." State leaders have suggested the debt is the consequence of California's overall broken unemployment insurance system. Experts have said the state was in a similar situation after the last recession. A recent report from the California Budget and Policy Center notes the system for years has been severely underfunded and outdated. "This has been an ongoing issue that the Legislature tried to tackle as part of past budgets, and we’ll continue to work on mitigating the immediate impacts of the federal UI tax increases, particularly for small businesses and non-profits, who are the heart of our economy," Senate Pro Tem Mike McGuire said in a statement. "As we work to make California more affordable, we look forward to working with the Speaker and Governor to craft long-term reforms that protect workers and lower the long-term tax burden on small businesses and non-profit organizations." A spokesman for Assembly Speaker Robert Rivas said, "This is a decades-old problem, so a lasting solution will require deep compromise between business and employees, and perhaps commission oversight. The Speaker’s priorities are clear: We must reduce economic uncertainty for our small business owners and always protect working-class families." California's Legislative Analyst's Office projected the state will see a small budget deficit this upcoming year of about $2 billion. In a recent analysis of the state's unemployment insurance system, the LAO said the state's annual budget shortfalls could balloon the outstanding federal debt. Among its suggestions to fix the system, the LAO has recommended the legislature significantly increase the taxable wage base from $7,000 to $46,800, which the office notes would tie the base to the amount of benefits a worker can actually get per week, which is $450. But the office said this step alone won't solve all of the problems. The LAO also recommended the legislature refinance the loan that involves both the state and businesses sharing the burden. See more coverage of top California stories here | Download our app | Subscribe to our morning newsletter