Guide to California Payroll Tax Requirements for Employers

California payroll taxes are a cornerstone of running a compliant business in the state. Paying the right amounts to the right programs keeps your business on track and helps fund programs that support workers and state services. Employers must navigate specific requirements for taxes that cover unemployment, workforce training, disability, and income.

Each payroll tax in California serves a different purpose. Some are directly tied to employee wages, while others are entirely employer-funded. Knowing the distinctions and responsibilities for each tax can save you from errors, penalties, and unnecessary headaches.

This guide outlines the four main payroll taxes employers need to manage: Unemployment Insurance (UI), Employment Training Tax (ETT), State Disability Insurance (SDI), and Personal Income Tax (PIT). Here's what every employer needs to know.

Understanding California Payroll Taxes

California payroll taxes include UI, ETT, SDI, and PIT. Together, these taxes fund programs that provide unemployment benefits, workforce training, disability coverage, and state public services. Employers contribute to some taxes, while others are deducted from employee paychecks.

Unemployment Insurance (UI)

UI supports workers who lose their jobs through no fault of their own. Employers pay this tax on the first $7,000 of each employee's wages annually. The rate depends on the employer's experience, but new employers typically start at 3.4% for up to three years. UI funding ensures unemployed workers receive temporary financial assistance while they search for new opportunities.

Employment Training Tax (ETT)

ETT is also employer-paid and funds workforce training programs in California. The tax rate is 0.1% of the first $7,000 of each employee's wages. These funds help businesses stay competitive by fostering a skilled workforce and supporting employee development in targeted industries.

State Disability Insurance (SDI)

SDI is funded by employees through wage withholdings, covering non-work-related injuries, illnesses, or pregnancy. The program also includes Paid Family Leave (PFL), which allows employees to take time off to bond with a new child or care for a seriously ill family member. The withholding rate is set annually by the state and applies to all wages without a cap. SDI provides financial security for employees during personal or family health challenges.

Personal Income Tax (PIT)

PIT is withheld from employee paychecks based on the information provided on Form W-4 or DE-4. California has a progressive tax structure, meaning employees pay higher percentages as income rises. There is no wage limit for PIT withholding, and the tax supports services like education, healthcare, and infrastructure. Employers are responsible for accurate withholdings to avoid underpayment issues for employees.

Registering as an Employer and Key Thresholds

Employers in California must register with the Employment Development Department (EDD) when paying wages that exceed $100 within a calendar quarter. This registration is not optional and establishes your ability to file and pay required state payroll taxes.

For household employers, the threshold is higher. You are required to register if you pay $750 or more in cash wages during a calendar quarter. This applies to roles such as in-home caregivers, housekeepers, or other domestic workers.

The registration process requires specific information about your business. Be prepared to provide:

Employer Identification Number (EIN): Your federal tax ID issued by the IRS.
Business addresses: Include both the physical and mailing addresses for your organization.
Responsible party details: Names and Social Security numbers of individuals managing or overseeing the business.

You can register through EDD's e-Services for Business, an online platform designed to simplify the process. Once completed, EDD assigns a Payroll Tax Account Number, allowing you to manage payroll tax filings and payments efficiently.

Wage Withholding and Deductions

Managing wage withholding and deductions is a fundamental part of staying compliant with California payroll taxes. Employers must account for all forms of compensation and ensure accurate amounts are withheld from employee paychecks to meet state and federal requirements. Errors in calculations or oversight can lead to penalties or payroll disputes.

Wages

California defines wages as all compensation provided for personal services. This includes payments made in cash, by check, through electronic transfers, or even non-cash benefits such as meals or lodging. For example, if you provide an employee with company housing or cover their meals, those benefits are considered wages and may be subject to payroll taxes. However, not all employment types are taxable under every state payroll tax, so it's important to confirm how taxes apply to each role within your organization.

Federal and State Payroll Withholding

Employers handle multiple layers of payroll withholdings. Federal requirements focus on Social Security and Medicare, while state-specific taxes address contributions to California programs like PIT and SDI.

FICA and Medicare: Employers must withhold Social Security and Medicare contributions from employee paychecks and match the amounts as part of their payroll responsibilities, as outlined under FICA.
PIT Withholdings: California uses a progressive tax structure, meaning withholding amounts increase with income. These deductions rely on information provided in Form W-4 or DE-4.
SDI Withholdings: Employers deduct SDI directly from wages with no limit on taxable income, funding benefits for non-work-related disabilities and Paid Family Leave.

Proper withholding is essential for avoiding underpayment issues and ensuring compliance with California payroll tax laws.

Exemptions from Payroll Tax Contributions

Some employment types qualify for exemptions from specific California payroll taxes. For instance, nonprofit and public entity employers may opt for the reimbursable method for UI. This approach allows employers to reimburse the state for UI benefits paid to former employees instead of paying UI taxes on a regular basis.

Certain workers, such as family employees or student workers, may also qualify for exemptions from taxes like PIT. Employers should carefully review employee classifications and consult state guidelines to confirm eligibility for any payroll tax exemptions. Misclassification can lead to audits and penalties, so accuracy is key.

Filing and Payment Process

To manage California payroll taxes effectively, employers must follow clear filing schedules and payment rules. Staying on top of deadlines and using the correct payment methods ensures compliance and avoids costly penalties.

Quarterly Filings

Employers submit quarterly wage reports to account for Unemployment Insurance (UI) and Employment Training Tax (ETT). Reports need to include detailed wage data and the taxes owed for each employee. The deadlines for these filings are:

April 30
July 31
October 31
January 31

Missing deadlines results in penalties and interest charges, so preparing ahead is key. Double-checking wage details and ensuring complete accuracy before submission reduces the risk of errors.

Regular PIT and SDI Withholding Submissions

Personal Income Tax (PIT) and State Disability Insurance (SDI) withholdings often require more frequent submissions than UI and ETT. Deposit schedules are based on the total payroll tax liability:

Semi-weekly deposits apply to employers with over $50,000 in payroll taxes.
Monthly deposits cover employers below the $50,000 threshold but above minimum limits.
Annual deposits are reserved for payrolls with minimal liability.

Employers should monitor payroll amounts to ensure correct submission frequencies. Payments must align with the schedule set by the Employment Development Department (EDD).

Available Payment Methods

California employers have several options for submitting payroll tax payments, with electronic methods being the most streamlined.

e-Services for Business: The primary platform for filing wage reports and paying taxes online. It simplifies account management and ensures secure submissions.
Express Pay or EFT: Direct payment methods for employers who need to send funds without filing through e-Services.
Mail: Accepted only with an approved waiver or in exceptional cases. Paper checks must still meet strict deadlines to avoid penalties.

Employers are required to choose the payment method that guarantees on-time delivery. Late submissions, regardless of the method, can result in fines.

Accuracy and Timeliness

Submitting accurate and timely reports is non-negotiable when handling payroll taxes in California. Errors in wage reporting or withholding calculations can lead to audits and additional costs.

Verify all wage data, tax rates, and withholding amounts before filing. Automated payroll systems can help reduce manual errors and streamline the reporting process. Following a consistent review process ensures compliance and keeps payroll operations running smoothly.

Reporting Requirements and the New Employee Registry

California requires employers to follow specific reporting rules when hiring workers or paying independent contractors. These guidelines help the state monitor employment activity, enforce legal obligations, and ensure accurate payroll tax reporting. Missing deadlines or providing incomplete information can lead to penalties, so staying organized is key.

New Hire Reporting

Every employer must report newly hired or rehired employees to the California New Employee Registry within 20 days of their first day of work. This includes employees working full-time, part-time, or on a temporary basis. A worker is considered rehired if they have been separated from the company for at least 60 consecutive days.

The report must contain:

The employee's full name, Social Security number, and residential address.
The employer's business name, address, and federal Employer Identification Number (EIN).
The employee's first day of paid work.

Employers can submit new hire reports electronically using the Employment Development Department's (EDD) e-Services for Business platform. Filing by mail or fax is an option through Form DE 34, though electronic submissions are faster and more reliable.

Independent Contractor Reporting

Independent contractors receiving $600 or more in compensation during a calendar year must also be reported to the state. This rule applies to contractors who do not qualify as employees under payroll tax laws. Employers must report contractors within 20 days of either the contract start date or the first payment.

The report must include:

The contractor's name, address, and Social Security or Taxpayer Identification Number.
The employer's business name, address, and EIN.
The date the contract began or when the first payment was issued.

Use Form DE 542 to file contractor information electronically or by mail. Accurate records of contractor payments ensure proper tax compliance and prevent filing errors.

Annual Reconciliation

At the end of the year, employers must reconcile all wages and withholdings to confirm accuracy. This process ensures amounts reported for payroll taxes, including PIT and SDI, match employee records and tax filings.

To reconcile:
1. Verify that year-to-date payroll records align with quarterly filings.
2. Ensure withheld taxes for PIT and SDI match the totals reported on employee pay stubs.
3. Compare the final amounts on Forms W-2 or 1099 to payroll tax filings.

Correct any discrepancies immediately with the EDD using amendment forms like the DE 9ADJ. Timely reconciliation avoids penalties and ensures clean records for the upcoming tax year.

Deadlines and Penalties

Meeting California payroll tax deadlines is non-negotiable for employers. Missing due dates or submitting inaccurate filings can lead to penalties, interest, and unnecessary complications. Understanding and adhering to the specific tax schedules for UI, ETT, PIT, and SDI is key to staying compliant and avoiding financial setbacks.

Key Deadlines

California payroll taxes follow strict filing and payment schedules. Employers need to track dates carefully to ensure timely submissions:

Quarterly Reports for UI and ETT: Reports and payments are due by the last day of the month after the end of each quarter.
First quarter: April 30
Second quarter: July 31
Third quarter: October 31
Fourth quarter: January 31
PIT and SDI Deposits: The frequency of these deposits depends on the total tax liability.
Semi-weekly: For liabilities exceeding $50,000, deposits must be made within three banking days of payroll.
Monthly: For liabilities under $50,000, deposits are due by the 15th of the following month.
Annual: Minimal liability employers may submit deposits once per year.

The Employment Development Department (EDD) assigns deposit schedules based on your payroll size. Staying organized and submitting payments on time prevents late fees and interest charges.

Penalties

California enforces penalties for non-compliance with payroll tax requirements. Employers can face repercussions for late payments, underreporting, or failing to file required information.

Late Payments: UI and ETT payments incur a penalty of at least 15% if submitted after the deadline. PIT and SDI penalties range from 2% to 10%, depending on the length of the delay.
Underreported Wages: Reporting incomplete or inaccurate employee wages leads to penalties equal to the unpaid tax amount, along with interest. Intentional underreporting can result in additional legal consequences.
Failure to Register Employees: Employers who do not report new hires or rehires within 20 days may be fined up to $24 per employee.

Penalties not only increase costs but can also damage employer credibility. Staying proactive with accurate filings and timely payments avoids these complications.

Overcoming Errors

Errors in payroll filings or payments can happen, but addressing them quickly reduces potential penalties. The EDD provides options for correcting mistakes and resolving discrepancies through its e-Services for Business platform.

Amend Incorrect Reports: Use Form DE 9ADJ to submit corrections for quarterly wage reports. Include accurate wage and tax data to resolve reporting errors.
Adjust Deposits: Overpaid or underpaid PIT and SDI amounts can be corrected by submitting an adjustment request online. Supporting records will be required for review.
Request Waivers: Employers who miss a deadline due to uncontrollable circumstances can apply for a penalty waiver. Written explanations and evidence must accompany the request.

Taking action as soon as an error is identified helps avoid additional interest or penalties. Regularly reviewing payroll records and reconciling filings ensures smoother operations and fewer problems in the future.

FAQ: Common Questions About California Payroll Taxes

California payroll taxes are complex but manageable when broken down clearly. Below are straightforward answers to the most common questions employers and employees ask about compliance, rates, and responsibilities.

How much are payroll taxes in California?

Payroll taxes in California include contributions from both employers and employees. Employers pay Unemployment Insurance (UI) and the Employment Training Tax (ETT), while employees see deductions for State Disability Insurance (SDI) and Personal Income Tax (PIT). Here's how the numbers look:

Unemployment Insurance (UI): Employers pay between 1.5% and 6.2% on the first $7,000 of each employee's wages based on their experience rating. New employers generally start at 3.4%.
Employment Training Tax (ETT): Employers also pay 0.1% on the first $7,000 of each employee's wages.
State Disability Insurance (SDI): Employees contribute a percentage of their wages, typically around 1%, with no cap on taxable income.
Personal Income Tax (PIT): Employees fund PIT through progressive rates that range from 1% for low-wage earners to over 13% for the highest incomes.

Each tax serves a specific purpose, from funding unemployment benefits to supporting disability and family leave programs.

What percentage of taxes is taken out of my paycheck in California?

The exact percentage depends on your income, filing status, and the information you provide on Form W-4 or DE-4. Key deductions include:

SDI Withholding: Employees often contribute around 1% of their total wages.
PIT Withholding: Rates are progressive and based on income. Low earners might have 1% withheld, while high earners could see up to 13.3% deducted.
Federal Taxes: These include Social Security at 6.2% (up to the annual wage cap) and Medicare at 1.45%.

Reviewing pay stubs regularly helps ensure withholdings align with your financial goals and tax obligations.

Who is exempt from California payroll tax?

Certain employees and employment scenarios are not subject to every payroll tax. Common exemptions include:

Nonprofit or Public Employees: Some employers opt for a reimbursable method instead of paying UI taxes.
Family Employees: Wages paid to a parent, spouse, or child under 18 may not require UI, ETT, or SDI contributions.
Student Employees: Full-time students working for the school they attend are often exempt from UI and SDI.

Always confirm exemptions through the California Employment Development Department (EDD) or a tax advisor to avoid misclassification risks.

What is California state tax on wages?

California's Personal Income Tax (PIT) applies to all wages without a cap. The progressive tax structure means that withholding rates increase as income rises:

Rates start at 1% for lower-income workers.
The top rate exceeds 13% for high earners.

Employers calculate PIT withholding based on the employee's DE-4 or W-4 information and use the state's annual tax tables. Employees earning more should double-check their withholding to avoid surprises during tax season.

Managing California payroll taxes is a complex but essential part of running a compliant business. By understanding the requirements, staying organized, and keeping up with updates, you can avoid penalties and keep your payroll running smoothly. If you're looking for a partner to help streamline your payroll processes and ensure compliance, let us show you how GoCo's modern HR software can help by booking a demo today.