The true cost of employees goes far beyond wages. Every new hire comes with tax obligations, and having a strong grasp on payroll taxes is something fundamental to your peace of mind as a business owner and employer.
Whether you are a household employer or taking care of a huge team, you need to understand how to compute taxable income, what to withhold, what to contribute, and how to file. Payroll taxes occur on both a federal and a state level, but today we will be taking a look at the specific issues around California payroll taxes.
Payroll taxes are calculated as a percentage of an employee’s income. Some taxes are deducted from the employee’s paycheck and some are paid by you, the employer, based on the employee’s wages. An employer usually becomes subject to payroll taxes after they have paid more than $100 to one or more employees in a calendar quarter. This holds true whether you run a business, a nonprofit organization, or have just hired a housekeeper or nanny for your home.
The first thing to know is that every California employer is required by law to report information about new employees to the California New Employee Registry within 20 days of their first day of work. You may do this in one of four ways:
- Submitting a Report of New Employee(s) (DE 34) electronically with the California Employment Development Department (EDD)’s e-Services for Business page
- Submitting a paper DE 34. You can download a fill-in DE 34 here
- Submit a copy of the employee’s W-4 form, but you also need to add the employee’s start-of-work date, your California employer account number and Federal employer identification number (FEIN) to the W-4
- You may also create your own form with the above information and mail it to the EDD
The four state payroll taxes
Most wages are automatically subject to all four taxes, but there are certain fields of employment where payroll tax liability is limited or not applicable. For a full list of types of employment and whether or not they are subject to payroll taxes/and or withholding, you can consult this list from the California Employment Development Department (EDD).
Payroll taxes are a complex subject, in part because there are four separate taxes which must be calculated. The first two, Unemployment Insurance (UI) Tax and Employment Training Tax (ETT) are paid by the employer. The other two, State Disability Insurance (SDI) Tax and California Personal Income Tax (PIT) are paid by the employee, but you are responsible for withholding these taxes on behalf of the state. Each of these taxes is calculated at a different rate:
Unemployment Insurance (UI) Tax
Unemployment insurance is in place to provide temporary support to people who are unemployed through no fault of their own.
- As the employer, you are responsible for paying this tax based on a percentage of the first $7000 in wages that you pay each employee over the course of a calendar year.
- Exactly how much you pay will depend on how long you have been an employer. For the first two to three years, you will pay 3.4 percent (.034) but this rate is subject to change, and will increase over time.
- The highest UI tax rate is currently 6.3 percent (0.62), which works out as a maximum tax of $434 per employee annually.
Employment Training Tax (ETT)
The Employment Training Tax was put into place to help the California labor market grow. The funds raised by the ETT are used to provide training to workers in certain targeted industries.
- In your first year as an employer, you will automatically be subject to ETT.
- After that first year, most employers will continue to pay the ETT, if they have a positive UI reserve account balance
- The ETT rate is one-tenth of 0.1 percent (.001) on the first $7,000 of taxable wages you pay each employee. This means that the maximum tax is $7 per employee each year.
State Disability Insurance (SDI) Tax
State disability tax program offers support payments to employees who are temporarily unable to work because of a non-work-related disability. The SDI tax also funds Paid Family Leave (PFL) benefits. The PFL program extends benefits to employees who cannot work because they are needed at home to take care of a family member who is seriously ill, or to bond with a new child.
- SDI is deducted from your employee’s wages.
- You are responsible for withholding a percentage of the first $106,742 in wages that you pay each employee over the course of a calendar year.
- In 2016, the SDI tax rate is 0.9 percent (.009) of SDI taxable wages per employee, per year, which means that the maximum tax is $960.68 per employee.
- SDI rates may change annually: they are set by the California State Legislature each year.
California Personal Income Tax (PIT)
Personal income tax is levied on the income of California residents as well as non-residents who are earning income in California. The funds raised by income tax pay for local amenities such as schools, public roads and parks, as well as health and human services. These taxes are administered by the EDD, which is also responsible for reporting, collections, and enforcement.
- PIT is deducted from your employee’s wages.
- The rate is based on the Employee’s Withholding Allowance Certificate (Form W-4 or DE 4) your employee filled out at the beginning of the year.
- There is no maximum amount of tax in this category.
Doing the calculations
With four different taxes to track, calculating your payroll tax liability and withholding rates can seem overwhelming, especially to new employers. If you break the task down into distinct steps, you may have an easier time navigating the system:
Determine taxable wagesThis is the first and most important step, because you will base all other calculations from this number. The EDD has a very helpful table with examples of how you would calculate the taxable wage for each employee
Calculate UI and ETTSince these are the taxes that you will be paying as the employer, determine your liability according to your rates. Current UI rates can be found on the EDD website: you will need to log in to see your specific rate.
Calculate SDIWithhold the current SDI rate, as determined by the California State Legislature: 0.9 percent in 2016.
Calculate PITCalifornia offers two methods for withholding schedules:
- Method A – Wage Bracket Table Method (PDF) – with Instructions
- Method B – Exact Calculation Method (PDF) – with Instructions
Get more information
If you are still worried about getting it right, don’t worry. There is more support available. California offers in-person payroll tax seminars to walk you through the process, and you can find a current schedule here.
If you want more specialized assistance, or if you are dealing with an especially complex payroll tax issue, it may be worth your time to consult with a tax professional or an attorney trained in tax law. Their intimate familiarity with all the rules and regulations means that they know the ins and outs of payroll taxes for business of all sizes. A one-on-one consultation gives them the chance offer you personal guidance and total peace of mind that you are meeting all the payroll tax requirements for the state of California.