The Complete Guide To California Payroll & Payroll Taxes
California has several payroll taxes and labor laws small businesses have to follow. Learn all of California's payroll tax laws and regulations so you can stay compliant.
California’s payroll taxes are more involved than other states, so small businesses need to be extra careful when processing payroll in California. We’ve made understanding California’s payroll taxes and labor laws easy so that you can pay your payroll taxes on time and stay compliant with the latest payroll laws.
Here’s what you need to know about California payroll taxes.
Table of Contents
How Much Are California Payroll Taxes? The Quick Answer
Small business owners in California are expected to pay federal payroll taxes (including FICA and FUTA), California personal income tax, California property taxes, and California sales tax, which is currently 7.25%. The exact cost of these payroll taxes will vary by business depending on how many employees you have and if there are any additional local taxes in your area.
Federal & State Payroll Taxes In California
California requires multiple payroll tax contributions from both business owners and their employees. The different rates at which you and your employees contribute typically change on an annual basis and are broken down based on your employee’s wages and how long your company has been in business.
As a business owner, you’re responsible for withholding the appropriate amount of taxes from each of your employees’ paychecks (and your own wages). Under most circumstances, employees also need to contribute parts of their paycheck toward State Disability Insurance (SDI) and Personal Income Tax (PIT). Employers do pay contributions toward Unemployment Insurance (UI) and Employment Training Tax (ETT). Certain industries grant California payroll tax exemptions to some of these payroll taxes. However, you’re typically responsible for withholding the proper amounts for these state-level taxes as a business owner.
Let’s look at how California’s payroll laws and regulations affect your business and your employees at the federal, state, and local levels.
California Payroll Tax Exclusions & Exemptions
California State’s Board of Equalization supports exemptions for some businesses, including religious, hospital, scientific, and charitable properties, or any properties that can be reasonably determined as owned and operated for nonprofit purposes. The board is also responsible for exempting properties qualifying for Welfare or Veteran’s Organization Exemption tax withholdings. California relies on the Board of Equalization to work with county-wide assessors to decide how best to administer additional property tax exemptions for the state.
California Labor Laws & Other HR Requirements
In addition to payroll taxes, small businesses in California have to follow California’s labor laws and several other payroll and HR regulations, including minimum wage, PTO, family leave, and more.
Drill down to learn exactly which payroll and HR laws your business needs to be compliant with.
How To Do Payroll In California
Now that you’re familiar with California payroll taxes and labor laws, you can begin looking at ways to submit your payroll reports and how to accurately calculate what you owe the state and federal governments when you run payroll.
Step 1: Make Sure You’re Following All California Payroll Laws
Be certain that you have the correct state and federal forms to submit payroll by each due date. Federal forms (Form 941) and state forms (DE9, DE 9C) should be submitted quarterly. Business owners who miss these deadlines are subject to federal and state penalties that accrue exponentially the longer you wait to report your payroll.
Step 2: Gather Employee Documentation
Now that you’re ready to calculate your payroll contributions, you can decide on the way you’ll report your information. Choose either a printed or digital version of the Deport of New Employee(s) (DE 34) form, a completed W4 form, or an in-house form that satisfies the California New Employee Registry’s requirements. Remember that you need to start processing payroll for employees who’ve started work within the last twenty days.
Step 3: Calculate Your Employee’s Hours
Once you’ve picked your method to submit payroll information, make sure you have the correct rates to calculate your four different taxes: UI taxes, ETT taxes, SDI taxes, and PIT taxes. As a refresher on calculating California’s four state-level taxes, remember to:
- Contribute a percentage between 3.4 to 6.3% of the first $7,000 of your employee’s wages. The percentage you contribute depends on how long you’ve been in business.
- Put .1 percent of an employee’s initial $7,000 of reported income toward ETT. You’ll be contributing seven dollars to each person you staff annually.
- Remind employees that they are responsible for submitting one percent of SDI-taxable paychecks on an annual basis against the first $122,909 of their wages.
- Ensure all of your employees have completed a W-4 form or DE 4 to report PIT tax.
For businesses with just a few people, you can consider using the wage bracket method to calculate payroll. The Wage Bracket method relies on your manual input, so be sure to closely follow the instructions detailed in the state’s withholding schedules. The Exact Calculation method should be used when you need to automate your calculations. Multiple small business payroll software processing solutions exist to do just that.
We suggest that you take advantage of any of these top payroll software tools for small businesses to crunch your staff’s payroll contribution numbers without errors.
Step 4: Deduct Federal & California State Payroll Taxes
Next, calculate and deduct any applicable taxes from each employee’s earnings. Here’s a rundown of the most important taxes you need to deduct on behalf of your employees:
- Federal Income Tax: You can calculate what each employee owes in federal income taxes based on the tax withholding tables published in the most recent edition of IRS Publication 15-A.
- FICA: These include Social Security and Medicare. You need to take note of the year-to-date income and the income limits for the deductions.
- Contributions To Savings Accounts: You’re also responsible for sending contributions to various social welfare programs on behalf of your employees, from health insurance to life insurance, 401(k), etc.
- Garnishments: If you receive a notice to garnish your employee’s paycheck, attend to it promptly to avoid legal issues.
- Miscellaneous Deductions: Finally, you need to check properly to ensure that you’ve factored in all the deductions you’re mandated to keep from your employee’s paychecks, including loan repayments for loans from banks and other lending institutions.
Step 5: Process Payroll
After determining tax withholdings and net pay, you need to turn your attention to the methods for distributing the paychecks. You can choose to process the paycheck manually, tearing out check leaves from a dedicated checkbook and writing out the checks. A faster method is direct deposits, but that requires a one-time setup fee for each employee and a small transaction fee for each deposit.
You can also outsource the paycheck distribution to a professional employment organization (POE) or use payroll software to automate the process completely. Payroll providers such as ADP and Gusto have experience working with the state of California and are well-suited for small businesses of any size.
Step 6: Don’t Forget To Keep Records
Of course, keep those records! You need to document and store all your payroll records and make them easy to retrieve when you need to report them to the proper federal and state authorities. Your payroll records should include details like:
- Employee’s full name and Social Security number
- Address, including ZIP code
- Employee’s schedule
- Total hours worked each day
- Type of pay (hourly or salaried)
- Regular pay rate
- Overtime and other earning
- All deductions from their paycheck
- Total monies paid each payday
- Payment dates and the period covered
Learn exactly which payroll records your business needs to keep and for how long.
California Payroll Tax & Business Resources
You now know the most important parts of implementing and managing a California-based payroll system. It’s natural to need some time to start working through tax reporting more quickly, but it’s only a matter of time before you feel confident and in control. No matter where you are in your payroll journey, there are resources and guides to help you get started.
For more information on calculating how much your employees owe in federal income taxes, take a look at the most recent edition of the IRS Publication 15-A.