A Californian small business is subject to four payroll tax laws that impact how payroll is processed. In our detailed guide, we'll dive into these four laws, the reporting and filing requirements, and everything you need to know about setting up payroll in California.
How to Do Payroll in California:
1. Identify which payroll laws affect your business.
Before you can start processing payroll in California, it's important that you're aware of the laws that impact your business. Failure to do so could result in audits, fines, and penalties. The payroll laws that apply to your business will be based on the size of your business, location, industry, and whether you hire permanent or part-time employees, or contractors.
California Laws That Affect Payroll:
California State Payroll Laws
Overtime & Breaks
Overtime is based on the hours in a day, hours in a week, and the number of days worked. Breaks are predetermined and employers are required to pay employees an additional $100.00 per day if they are unable to take breaks.
Unemployment, Disability & Workers' Compensation
Californian employers participate in the state unemployment fund, and disability and unemployment insurance is state-mandated.
California minimum wage is $12.00 per hour. Other rates apply to different kinds of employees (part-time, permanent, contractor).
Paid Time Off & Leave
The California state laws that oversee paid sick leave, pregnancy leave, disability, and unemployment are based on your business's size. Most of the laws apply to businesses with a minimum of 5 employees.
Pay stubs are required in California semi-monthly or at the time of each payment of wages. In addition, the information on the pay stub is mandated. Pay stubs must include employers' name, address, all deductions, and more.
In total, California has four payroll tax laws of which two are paid by the employer and two are paid by employees.
2. Apply the four California payroll taxes.
Outside of the federal and state laws that impact all employers, California also has its own payroll tax laws that oversee employment. Payroll tax in California is managed by California’s Employment Development Department (EDD).
California Payroll Taxes:
Unemployment Insurance Tax (UI):
Implemented by the U.S. Department of Labor under the Social Security Act, the Unemployment Insurance Tax was created for unemployed individuals who were laid off through no fault of their own. In this case, unemployment insurance ensures laid-off employees have access to a temporary income.
A tax-rated employer is required to pay the Unemployment Insurance Tax. The employer will pay a specific percentage on the first $7,000 of each employee’s wages in a calendar year. However, this amount can't exceed $434.00 per employee (calculated at the highest UI tax rate of 6.2% x $7,000). For new employers, you can expect to pay 3.4% for a period of 2-3 years. Every December, employers are notified about their UI rate schedule and the amount of taxable wages they owe.
Employment Training Tax (ETT).
The employment training tax was created to grow the U.S. labor force, providing funds for employee training to businesses in designated industries. Employers are required to pay .001% of the first $7,000 in wages paid to every employee in a calendar year, which works out to around $7.00 per employee.
State Disability Insurance Tax (SDI).
State Disability Insurance Tax was designed to temporarily support employees who are unable to perform work duties due to non-work-related illnesses, injuries, or pregnancy. In addition, the SDI tax also supports Paid Family Leave (PFL) benefits, which allows employees to stay home if they need to help care for a seriously ill family member.
SDI is deducted from an employees’ wages, with employers withholding 1.00% for SDI on the first $122,909 in wages paid to every employee in a calendar year. The maximum SDI tax is $1,229.09 per employee, per year ($122,909 x 1.00%).
California Personal Income Tax (PIT).
While California Personal Income Tax is paid by employers, California employees or nonresidents (who earn income from the state) are responsible for withholding it from their paychecks. PIT provides funding for public services like schools, medical institutions, public parks, road developments, and other human services. With no taxable wage limit, the amount will be based on the employee’s Form W-4 or DE 4.
3. Register as an employer.
Employers are required to register with the California Employment Development Department if they hire one or more employees, and pay wages in excess of $100.00 in a calendar quarter. For household employers with one or more employees, you are required to register if you pay wages in excess of $750.00 in a calendar quarter.
How to Register with the EDD:
- Log in to e-Services for Business with the username and password you entered when setting up your account.
- Click on "New Customer."
- Click on "Register for Employer Payroll Tax Account Number."
- Complete the registration application.
- Click "Submit."
The information you need to register will depend on your type of business. You can view the required information for each industry on the EDD website.
Registering as an employer with the EDD will provide you with an employer payroll tax account number. Also referred to as a State Employer Identification Number, SEIN, or state ID number, this 8-digit number is required for all EDD transactions, including filing returns, making deposits, and in all electronic and paper filings.
4. Study all employer responsibilities.
As an employer, you will be held liable for any miscalculations or incomplete filings. Frequent errors could result in penalties and delayed payroll. Therefore, it's important that you study and understand all your responsibilities as the employer.
Employer responsibilities include:
- Reporting wages paid to employees and State Personal Income Tax (PIT) withheld from their wages.
- Paying Unemployment Insurance (UI) and Employment Training Tax (ETT) on your employee’s wages, and withholding and remitting State Disability Insurance (SDI) and Personal Income Tax (PIT) due on wages paid to your workers.
- Reporting newly hired or rehired employees to the New Employee Registry within 20 days of their starting date. An employee is classified as a rehire if they did not report to work for 60 consecutive days. In addition, if you frequently make use of contractors, you might be required to report them as well.
- Posting notices and information about employee benefits.
- Submitting employment tax returns, wage reports, and payroll tax deposits to the EDD if you have more than 10 employees.
5. Process payroll.
How you process payroll in California depends on your business and personal preference. You can either manually process payroll, outsource payroll, or make use of payroll software like Gusto. When processing payroll, it's important that you include the different Californian payroll taxes. To ensure you remain compliant, study the difference between employee and contractor, check the California rules and regulations, keep all payroll records, and stay ahead of deadlines.
6. Follow due dates and filing requirements.
As mentioned in the third step, an employer is required to file specific information periodically. These include employment tax returns, wage reports, payroll tax deposits, and more. In addition, if your business experiences any changes, including change in a business name, address, or legal entity, you can make use of the e-Services for Business platform to complete filings, which also offers multiple payment options.
Common forms that you are required to file:
- Report of New Employee(s) (DE 34).
- Report of Independent Contractor(s) (DE 542).
- Quarterly Contribution Return and Report of Wages (DE 9).
- Quarterly Contribution Return and Report of Wages (Continuation) (DE 9C).
- Payroll Tax Deposit (DE 88/DE 88ALL).
Timelines for Forms:
Filing Due Dates
January, February, March
April 30, 2020
April, May, June
July 31, 2020
July, August, September
November 2, 2020
October, November, December
February 1, 2021
The table above shows the due dates for the Quarterly Contribution Return and Report of Wages, Quarterly Contribution Return and Report of Wages (Continuation), and Payroll Tax Deposit.
Other filing requirements:
PIT and SDI deposit due dates are based on the federal deposit schedule, payday, and state PIT withholding. You are required to make Monthly SDI and PIT deposits if either:
- You are a quarterly depositor but accumulate $350.00 or more in PIT during one or more pay periods.
- You are a next-day or semiweekly depositor and you accumulate $350.00-$500.00 in PIT during one or more pay periods.
How do I find my California employer payroll tax account number?
Californian employers can find their payroll tax account number on the Quarterly Contribution Return and Report of Wages (Form DE-9/ DE-9c) or on any other official notices sent by the Employer Development Department.
What is the California employer payroll tax account number?
The California payroll tax account number is an eight digit number issued by the EDD. The number is used in all EDD-related interactions and filings. All employers with one or more employees are required to register for an account number.
How much does an employer pay in payroll taxes in California?
Does California have local payroll taxes?
Yes, California has four local payroll taxes. These include Unemployment Insurance TAX (UI), Employment Training Tax (ETT), State Disability Insurance Tax (SDI), and California Personal Income Tax (PIT).