California Payroll Tax: What Employers Need to Know

Congratulations! You’ve reached the point in your small business where you’re ready to hire your very first employee (or employees!). However, now is also the time that you have to get familiar with payroll taxes, something you’ll either have to pay or withhold from you employee’s checks and send into the government on their behalf.

Every state has slightly different tax rules and regulations. This post will specifically dive into California state tax laws, which impact a large amount of small businesses– around 3.9 million! For small business owners based or operating in California, here are the basics you should understand about the California payroll tax and what they’re used for.

What types of taxes are included in the California payroll tax?

California payroll tax is administered by the State of California’s Employment Development Department and consists of four separate taxes: Unemployment Insurance TAX (UI), Employment Training Tax (ETT), State Disability Insurance Tax (SDI), and California Personal Income Tax (PIT).

When it comes to making sure you’re doing all of your California payroll tax duties as an employer, it’s important to remember that every California employer is must report information about new employees to the California New Employee Registry within 20 days of their first day of work. This reporting is the lynchpin of the entire system and is certainly not something any small business wants to skip.

How much does the employer pay for California payroll tax?

The rate for California payroll tax is the sum of the four individual payroll tax rates combined. The rate for each individual tax is unique—the Employment Development Department has a handy website that breaks down the actual percentages based on income, which you can access here—and some are paid by employers and some are paid by employees. Here’s a breakdown of who pays which tax and what the rates are:

• Unemployment Insurance Tax is paid by the employer. This tax is calculated as a certain percentage of the first $7,000 of each employee’s wages. Employers in their first two to three years of business pay 3.4 percent and goes up over time with the current cap sitting at 6.3 percent.
• Employment Training Tax is the way that California funds a program that’s designed to grow the California labor force. Every employer in their first year of business is required to pay this California payroll tax, but many with positive UI reserve accounts continue to pay it beyond the first year. This tax is also based on the first $7,000 of taxable wages per employee but is just 1.0 percent, working out to roughly $7 per employee each year.
• State Disability Insurance Tax is the program that supports employees who are temporarily unable to work because of disability. This tax is paid by employees, but employers are required to withhold it from their paychecks. This tax is currently 0.9 percent.
• California Personal Income Tax is the other California payroll tax that’s paid by employees rather than employers, but employers are again responsible for withholding it from their paychecks. This tax rate varies and is based on the Withholding Allowance Certificate (form W-4 or DE 4) that each employee fills out. The unique thing about this tax is that, unlike the other taxes here, there is no maximum amount for the personal income tax.