The Complete Guide To California Payroll & Payroll Taxes

California payroll is more complex than payroll in many states because employers must handle federal payroll taxes, California income tax withholding, unemployment insurance, employment training tax, and State Disability Insurance withholding.

California employers also need to follow state and local labor rules covering minimum wage, overtime, paid sick leave, wage statements, pay frequency, workers’ compensation, and payroll recordkeeping.

This guide breaks down the California payroll taxes and labor laws small business owners need to know.

How Much Are California Payroll Taxes? The Quick Answer

California employers are responsible for federal payroll taxes and several state payroll tax obligations. At the state level, California payroll taxes include unemployment insurance, employment training tax, State Disability Insurance withholding, and California personal income tax withholding.

Some California payroll taxes are paid by the employer, while others are withheld from employee wages. The total cost depends on your taxable wages, employee count, payroll tax rates, and any local or industry-specific requirements that apply to your business.

California businesses may also owe other taxes, such as sales tax or property tax, but those are separate from payroll taxes.

Federal & State Payroll Taxes In California

California has four state payroll taxes: Unemployment Insurance, Employment Training Tax, State Disability Insurance, and Personal Income Tax withholding.

Unemployment Insurance and Employment Training Tax are employer-paid contributions. State Disability Insurance and Personal Income Tax are withheld from employee wages. Employers must also handle federal payroll taxes, including federal income tax withholding, FICA, FUTA, and Additional Medicare Tax when applicable.

California businesses may also be responsible for other taxes, such as sales tax, use tax, or property tax, but those are separate from payroll taxes.

California Payroll Tax Exclusions & Exemptions

California payroll tax rules vary depending on the type of worker, type of wages, and type of employment. In general, California wages are subject to Unemployment Insurance, Employment Training Tax, State Disability Insurance, and Personal Income Tax withholding unless a specific exemption applies.

Some types of employment may be exempt from one or more California payroll taxes. For example, certain family employment, religious service, student work, domestic service, out-of-state government employment, and some types of sales work may receive special tax treatment depending on the facts.

Independent contractors are treated differently from employees. Businesses generally do not withhold payroll taxes for properly classified contractors, but contractors are still responsible for their own income and self-employment taxes.

California Labor Laws & Other HR Requirements

In addition to payroll taxes, California employers need to follow state and local labor laws covering minimum wage, paid sick leave, meal and rest breaks, wage statements, pay frequency, child labor, workers’ compensation, and workplace notices.

How To Do Payroll In California

Once you understand California payroll taxes and labor laws, running payroll comes down to collecting employee information, calculating gross pay, withholding taxes, filing reports, paying employees, and keeping accurate records.

Step 1: Register & Review California Payroll Laws

Before running payroll, make sure your business is registered with the California Employment Development Department and has the correct employer payroll tax accounts.

California employers may need to handle UI, ETT, SDI, and PIT withholding, plus federal payroll taxes. Employers must also follow California rules for minimum wage, overtime, meal and rest breaks, wage statements, pay frequency, workers’ compensation, and new-hire reporting.

Step 2: Gather Employee Payroll Documents

Before paying employees, collect the forms and information needed to run payroll correctly, including:

• Form W-4 for federal income tax withholding
• California Form DE 4 for state income tax withholding, if needed
• Form I-9 for employment eligibility verification
• Direct deposit information, if applicable
• Employee pay rate, pay schedule, classification, and deduction information

California employers must also report newly hired or rehired employees to the New Employee Registry within 20 days of the employee’s start-of-work date. Employers can use Form DE 34 or submit the information electronically.

Step 3: Calculate Gross Pay

Calculate each employee’s gross pay based on their pay type. For hourly employees, multiply hours worked by the hourly rate and include overtime when required. For salaried employees, divide the annual salary by the number of pay periods.

Include bonuses, commissions, tips, PTO, sick leave, reimbursements, and other taxable compensation when applicable.

Step 4: Calculate Taxes & Deductions

California employers must withhold federal income tax based on Form W-4 and California PIT based on the employee’s state withholding information and current California withholding schedules.

Employers and employees also pay FICA taxes. Social Security and Medicare apply at the federal level, and employers must also withhold Additional Medicare Tax from employee wages over the federal threshold when applicable.

For California state payroll taxes, employers pay UI and ETT, while employees generally pay SDI and PIT through wage withholding. For 2026, the ETT rate is 0.1% on the first $7,000 in wages per employee, and the SDI withholding rate is 1.3% with no taxable wage limit.

Finally, subtract any required or employee-authorized deductions, such as benefit contributions, retirement contributions, wage garnishments, child support, or other approved deductions.

Step 5: Pay Employees & File Payroll Records

After calculating gross pay, taxes, deductions, and net pay, pay employees using an allowed payment method, such as direct deposit, paper check, or another approved method.

California employers must also file payroll tax reports with the EDD. Employers generally must file both Form DE 9 and Form DE 9C each quarter.

Step 6: Keep Payroll Records

Keep payroll records organized and secure. Records should include employee names, Social Security numbers, addresses, pay rates, hours worked, pay periods, payment dates, deductions, and tax records.

The IRS generally requires employment tax records to be kept for at least four years. FLSA payroll records should generally be kept for at least three years, while wage calculation records, such as timecards and work schedules, should generally be kept for at least two years.

Learn exactly which payroll records your business needs to keep and for how long.

California Payroll Tax & Business Resources

California payroll has several moving parts, including state payroll taxes, federal payroll taxes, wage statements, new-hire reporting, workers’ compensation, paid sick leave, and payroll recordkeeping.

For official California payroll guidance, use the California Employment Development Department for UI, ETT, SDI, PIT withholding, new-hire reporting, and quarterly payroll filings.

Use the California Department of Industrial Relations for minimum wage, overtime, meal and rest breaks, paid sick leave, wage statements, and workers’ compensation.

For federal payroll rules, use the IRS for federal withholding, FICA, FUTA, and employer tax filing guidance, including Publication 15-T for federal income tax withholding tables.

And to simplify payroll for your business, check out the best payroll software.