The California payroll tax structure for an employer in this state is based on four distinct taxes, commonly referred to as the CA SUI, ETT, SDI, and PIT payroll taxes. There are different rates for each of these taxes and the calculation methods are different as well.
Employers must be mindful of these taxes as they represent the true cost of employees. Each new hire adds to the tax obligations. Employers must understand the fundamentals of California employee taxes to ensure their business remains in compliance.
You may be asking yourself what are payroll taxes in California? Particularly if you own a small business or employ staff for your home. When you bring an employee or employees onboard, you'll need to be mindful of payroll taxes. You'll either have to pay the taxes or withhold them from the paychecks of the people that you employ.
Payroll taxes in California are administered by the Employment Development Department of the state and not the IRS. There are four separate California employment taxes that you need to know about, and we’ll discuss them in more detail shortly.
You will be subject to employer taxes in California if you have paid more than $100 to a single or multiple employees in a calendar quarter. This California employer taxes requirement applies whether you run a business, operate a nonprofit organization, or have simply hired help for your home like a nanny or housekeeper.
Your payroll tax California obligation begins within 20 days of your new employee's first day of work. The law requires every employer in California to report information about their new employees to the California New Employee Registry within the aforementioned timeframe.
It's common for payroll tax employer responsibility to be confused with the payroll tax vs income tax question. Simply put, the income tax burden is entirely on the employee, whereas the payroll tax is effectively split between the employer and the employee.
So who collects payroll tax in California? The Employment Development Department of the State of California. There are different file and payment options that you can utilize to submit payroll taxes. You can enroll in e-Services for Business and Express Pay or simply file by mail.
Lets comprehensively discuss the question, what payroll taxes do employers pay in California? Simply remember this: There are four individual payroll tax rates and most wages will automatically be subject to all four of these CA payroll taxes.
There are some jobs in which the payroll tax liability is limited to not applicable at all. Check this list from the California Employment Development Department to see which types of employment have limited or no liability at all.
So what is CA SUI tax? This is a tax charged to provide temporary support to those who are unemployed through no fault of their own. As an employer, you're liable to pay this tax.
The UI tax rate calculation is based on a percentage of the first $7,000 in wages that are paid to each employee during a calendar year. How long you've been an employer dictates how much unemployment insurance tax you'll need to pay.
Many employers ask, what is ETT and how does it apply to me? The CA employment training tax was imposed to make the California labor market grow. These funds are used to provide training to workers in targeted industries. You'll automatically be subject to ETT in your first year as an employer.
After the first year, most employers will continue to pay the ETT, as long as they have a positive UI reserve account balance.
So what is California SDI tax then? The CA disability tax is another employment tax in California. It provides support payments to employees that are unable to work temporarily due to a non-work-related disability.
The state disability insurance also funds the Paid Family Leave benefits, enabling employees who can't work because they are needed at home to care for a family member that's seriously ill, or to bond with a new child.
Another common question asked is, what is PIT withholding in California? This Personal Income Tax is levied on the income of both California residents and non-residents that earn income in the state.
The funds collected from this tax are utilized for local amenities such as public roads, schools, parks as well as health and human services. Even though it's called a Personal Income Tax, this is an employment tax in California that you as an employer have to pay.
CA payroll tax deductions are a complicated subject since four individual taxes must be calculated separately. The CA SUI and CA ETT taxes are paid by the employer whereas the CA SDI and CA PIT taxes are paid by the employee.
However, as the employer, it's your responsibility to withhold these taxes on behalf of the state. All four taxes are calculated at different rates which are highlighted below.
The California SUI rate is 3.4 percent for the first two to three years, but remember, this rate is subject to change and may increase over time. The highest CA SUI tax rate is currently 6.2 percent which equals a maximum tax of $434 per employee, per year.
The CA ETT rate is one-tenth of 0.1 percent on the first $7,000 of taxable wages that you pay each employee. The maximum tax will thus be $7 per employee each year.
The CA disability tax rate is set by the California State Legislature every year, it can change annually. The SDI is deducted from your employee's wages and you're responsible for withholding a percentage of the first $145,600 in wages that you pay each employee in a calendar year.
In 2022, the SDI withholding rate is 1.1 percent per employee, per year. The maximum tax will thus be $1,601.60.
The CA PIT tax rate varies and is based on the Employee's Withholding Allowance Certificate. That's going to be the Form W-4 or DE 4 that was filled out by your employee at the beginning of the year. There's no maximum amount of tax in this category.
Given that there are four different taxes to track, calculating all of your CA employer payroll taxes can be overwhelming, particularly if you're a new employer. You can make the task easier by breaking it down into distinct steps.
Determine taxable wages
This is the most important step as all calculations will be based on this number. Use the CA EDD's table that includes examples of how you can calculate the taxable wage for your employee.
Calculate UI and ETT
These are the California employer taxes that you'll be paying. Calculate your liability according to your rates. The EDD website lists the current UI rates and you'll have to log in to see your specific rate.
This is one of the simpler steps. Use the current SDI rate, 1.1 percent in 2022, and withhold the amount from your employee's paycheck.
Similarly, calculate the PIT for your employee using the two methods for withholding schedules offered by California:
Method A - Wage Bracket Table Method (PDF)
Method B - Exact Calculation Method (PDF)
The state provides considerable information to demystify employer taxes in California. It conducts in-person payroll tax seminars where you'll be educated about the process. The current schedule for these in-person seminars can be found on the EDD's website.
However, situations may arise where you require specialized assistance, particularly if you're facing complex payroll tax issues. Then it might be best to consult with an attorney trained in tax law or a tax professional.
Consulting with a professional in this field will enable you to remain in full compliance with the payroll tax requirements for California. The personal guidance and solutions provided to you, based on familiarity with the state's rules and regulations, will ensure that you never encounter costly tax issues and remain a model taxpayer.
Need personal guidance? At Brotman Law, we specialize in resolving California employer tax issues. Request a free consultation today and we’ll be happy to help.
As your business grows and you hire more employees, the higher your compliance burden and employer contributions are going to become. The state relies on this income from employers to fund many crucial services that improve the quality of life for the residents of California.
However, the California state employment tax system happens to be one of the most complex in the country. Employers in California have to be mindful of these liabilities. It’s important to remain in compliance to avoid any issues, as tax disputes can be very costly for businesses.
You’ll be fine as long as you understand what the four individual payroll taxes are, what their rates are, and how they’re supposed to be calculated and withheld. There’s also support available from the state that you can take advantage of. If you ever find yourself in a payroll tax issue, it’s best to consult with a tax attorney so that you can identify and fix any issues with your business tax returns.
Payroll tax is not the same as income tax payments. The payroll tax is paid by both the employer and the employee, while income taxes are only paid by the employee. However, payroll and income tax withholding on behalf of the employee remain the employer's responsibility.
Employers have to pay payroll taxes as the government relies on this income contributed by business owners to fund social security programs like Medicare as well as other specific programs. These funds are also utilized to improve local public services in the state such as roads and schools.
There's no way that you as an employer can completely avoid paying payroll taxes, but there are ways to reduce payroll tax liabilities. By paying employee benefits that are exempt from payroll taxes, or by hiring independent contractors who handle their own payroll taxes, you can reduce payroll tax liabilities.
Our best stuff: secrets, tax saving tools, and tax defense strategies from the braintrust at Brotman Law.
These ten big ideas will change the way you think about your taxes and your business.
Find the articles and videos you need to make the right tax decisions in the learning center.
It is not just about what we do, but who we are, why we do it, and how that benefits you.
Meet with us to outline your strategy. No further obligation, 100% money-back guarantee.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this website is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter contained in this website.