Doing the California Payroll Tax 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 Wages
This 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 ETT
Since 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.
Withhold the current SDI rate, as determined by the California State Legislature: 0.9 percent in 2016.
California offers two methods for withholding schedules:
- Method A – Wage Bracket Table Method (PDF) – with Instructions
- Method B – Exact Calculation Method (PDF) – with Instructions
How to Get More Information About These California State Payroll Tax Calculations
If you are still worried about getting it right, do not 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 familiarity with all the rules and regulations means that they know the ins and outs of payroll taxes for businesses of all sizes.
A one-on-one consultation gives them the chance to offer you personal guidance and total peace of mind that you are meeting all the payroll tax requirements for the state of California.
Other Issues Concerning California State Payroll Taxes
California has some other tricky rules for state payroll taxes:
- If you have family members working for you, they are subject to state personal income tax withholding, but they are not subject to unemployment insurance, employment training taxes or state disability insurance payments.
- Family members include children under the age of 18 employed by a parent, or partnership consisting only of parents and include adopted children but not stepchildren or foster children.
- Family members also include persons employed by a spouse or a registered domestic partner or a parent employed by a son or daughter, again including adoptive parents but not stepparents or foster parents.
- Most nonprofit organizations are subject to unemployment insurance, employment training tax, state disability insurance and personal income tax withholding.
- Special exclusions from unemployment insurance and state disability insurance payments include elected officials, members of legislative bodies or the judiciary, and members of the state National Guard or Air National Guard except those who provide services as regular state employees.
California Payroll Tax Pitfalls and Penalties
The greatest pitfall in dealing with federal and state income taxes can be attempting to handle them yourself as a business owner. The larger your business, the more complicated payroll taxes become.
If you only have a couple of employees or are experienced with the California payroll tax provisions, you may be able to take care of it yourself or pay an accountant, but at a certain point, you may require the services of a tax attorney to advise you about the details of tax law or to help you resolve penalties.
Sometimes employers are not aware of those defined as statutory employees. These are individuals who may not be employees as defined by common law but who should be classified as employees for employment tax purposes.
- Any officer of a corporation
- Agent-drivers or commission-drivers
- Traveling or city salespersons
- Unlicensed construction workers engaged to perform services for which a license is required
- Workers who have a work-for-hire provision in their contract
As mentioned in previous chapters, the IRS has something known as the Trust Fund Recovery Penalty or TFRP (previously called the 100 Percent Rule). This extends liability for payroll taxes to corporate officers and owners of the company. However, this is limited to what was withheld from an employee’s wages, and it cannot hold an individual responsible for employer matching funds.
The California Employment Development Department has similar rules and powers but the penalties tend to be more severe in proportion. The EDD rules state that any officer, major stockholder, or other person with the responsibility for EDD payroll tax compliance who willfully fails to comply with EDD withholding laws is personally responsible for 100 percent of every red cent owed by the corporation or LLC.
If that person is you, you will be required to pay interest on the late payment as well as penalties.
The EDD and IRS equally do recognize a difference between miscalculation and tax evasion. If you simply miscalculated, it is considered to be non-willful, and you will still be responsible for penalties and interest plus you will need to file corrected tax returns.
Evasion, on the other hand, is punishable by criminal charges. Evasion can take the form of willfully misclassifying employees as independent contractors, falsifying returns, and paying workers in cash.
California Payroll Tax Penalty Resolution
Penalty resolution involves paying the full amount of payroll taxes owed plus the penalties levied by the taxing organizations. If you have been charged with evasion, of course, you will also be facing potential jail time.
You are within your rights to dispute taxes and penalties, which is where an experienced tax attorney comes in handy. However, you must understand that, while you can appeal, you will be expected to pay taxes on time until the appeal is resolved.
Both the IRS and the EDD are amenable to setting up installment payments to keep the total amount due at one time to a manageable level. You can also request an Offer in Compromise or a Hardship letter.
Payroll taxes, both federal and state, can be difficult to understand, but unwillful errors can still be costly. If you misclassify an employee or do not handle withholding properly for family members who work for you, or if you run a non-profit organization and do not handle taxes properly, you will be responsible for not only back taxes but interest and penalties, too.
An experienced tax attorney can help you avoid the pitfalls of tax law and provide valuable assistance for disputes, appeals, and other methods of resolving tax problems.