If you’re a California employer, you need to know all the state’s payroll laws to process payroll correctly and keep tax departments happy. In The Golden State, that means registering your business with the appropriate agencies, reporting new hires properly and on time, and calculating all payroll taxes correctly.
California has income tax plus three additional payroll taxes for employers to remember to calculate with every employee’s paycheck.
Follow along with this guide to learn how to keep your payroll compliant in California.
Step 1: Register Your Business with the California Tax Department
California requires businesses to register with the Employment Development Department (EDD) when their payroll reaches at least $100. Here’s what to do:
- Visit e-Services for Businesses and click Enroll.
- Enter your business information and click the button to continue.
- Verify your email address using the link in your email.
- Log in with the account you just created.
- Register for your California payroll tax number.
- Complete the registration process by filling in any required information and submitting the form.
Once you receive your payroll tax number, you can use it and your account to file and pay your payroll taxes.
When registering, have your Federal Employer Identification Number handy from your federal tax registration, plus the name, address, and contact information for your business contact person, if applicable.
Step 2: Submit New Hire Information
California’s New Employee Registry is the database you’ll report new hires to. New hires must be reported within 20 days of the day they start working for you.
If you report new hires electronically, you can do so in two batches per month, but each reporting batch has to be between 12 and 16 days apart.
In addition to filing federal tax forms, you’ll also need to collect California’s DE 4, a form indicating an employee’s withholding allowances for state income tax purposes.
Once you have your employee’s information and forms, submit everything via the e-Services for Businesses portal you registered for in Step 1.
Step 3: Calculate and Pay California’s Withholding Taxes
California has two taxes that come out of employee paychecks:
- Personal Income Tax (PIT): PIT is income tax that’s calculated based on an employee’s gross wages per pay period minus any tax allowances. PIT ranges from 1% to 12.3%.
- State Disability Insurance (SDI) Tax: SDI tax helps fund the state’s paid family leave and disability insurance programs extended to workers who need them. The rate for 2024 is 1.1% of employee wages.
Use an employee’s gross income to determine how much to withhold from each paycheck. Remember to deduct any allowances an employee has marked on their DE 4.
Follow California’s withholding schedule for taxes to withhold, including allowances.
For example, a single taxpayer with two allowances making $2,000 biweekly should have $49.26 in PIT withheld from their paychecks.
In addition, you’d withhold 1.1% of the employee’s gross wages. So, for the employee earning $2,000 for this pay period, you’d withhold $22 for SDI tax ($2,000 x 0.011).
File and pay both taxes through e-Services for Business quarterly by April 30th, July 31st, October 31st, and January 31st.
If you withheld less than $350 in PIT, you don’t need to make deposits. But if you withhold up to $500 in PIT, you’ll need to make deposits monthly by the 15th of the following month.
PIT withholdings of more than $500 may require semi-weekly or daily deposits; the state will let you know which you’re responsible for based on your federal deposit schedule.
Step 4: Calculate and Pay California’s Payroll Taxes
In addition to withholding taxes, California has two employer-paid payroll taxes that do not get withheld from employee paychecks:
- Unemployment Insurance (UI) Tax: UI tax supports California’s unemployment insurance program. Employers start with a rate of 3.4% but can have a rate up to 6.2%, as determined by the state.
- Employment Training Tax (ETT): ETT goes toward state programs that help enhance its workforce through education and training programs. In 2024, employers pay 0.1%.
Both of these taxes have a taxable wage limit of $7,000 per year. Therefore, as an employer, you’d only pay the tax on the first $7,000 an employee makes this year.
So, if you have a new employer rate of 3.4% for UI tax, you’d pay $238 for one employee for the entire year ($7,000 x 0.034). Your ETT would be $7 for the year ($7,000 x 0.001).
File and pay both taxes through e-Services for Business quarterly by April 30th, July 31st, October 31st, and January 31st.
Step 5: Organize and File Payroll Records
California requires employers to hold onto payroll records for at least four years, which is longer than the federal requirement of three years. Also, if any legal action occurs against the employer regarding one or multiple payroll records, the employer needs to keep those payroll records until the legal action has been completely resolved.
For each pay period and each employee, these records need to show the total hours worked, gross wages, net wages, deductions, pay dates, hourly rates, and the employer’s and employee’s name and address.
The Best Way to Run California Payroll
I talk a lot about payroll software, but once you try it for yourself, you’ll understand why. I could never go back to managing payroll myself after using payroll tools, which pretty much do everything I can do in terms of running payroll, but better, more efficiently, and more accurately.
Whether you’re dealing with running payroll in one state or multiple states, payroll software makes a big difference.
For example, if you operate in California, Nevada, and Washington, you need to know how tax, payroll, PTO, and PTO payout laws vary by state. Even if you’re only operating in California with California employees right now, you need to know all of California’s PTO laws, tax laws, payroll recordkeeping laws, etc., to run payroll correctly.
Payroll software helps with all of that, staying updated on law changes and tax rates to keep you compliant.
I don’t suggest for any employer to run payroll manually if they can afford using payroll software. It’s just not worth the hassle and potential mistakes that can lead to costly errors in the future. Pay your employees on time and in compliance with all state and federal guidelines, plus wrap up all your loose payroll ends with payroll software.
Not sure which tool to use? Check out our comprehensive guide to the best payroll software and services.
