California payroll tax: Here’s what employers need to know
California has one of the country's most complicated tax structures—including payroll tax. There are 4 different payroll taxes in the State of California, each with its own rates and calculation methods. Certain payroll taxes are paid by the employer; others are paid by the employee. However, even though you do not directly pay for all 4 payroll tax types, you are responsible for managing and keeping records for them.
These are local taxes, not federal ones, though some have a federal equivalent that must also be paid by you or your employees.
If you are a new employer in the State of California, you may find the state’s complex payroll tax structure overwhelming, especially with everything else you have to do to get your business off the ground. Don’t worry—we’ve got you covered.
Let’s break down all you need to know about California payroll tax as a small business owner. This information will help you have the peace of mind and confidence you need to hire and maintain a roster of employees in your business.
What is California payroll tax?
California payroll tax is a series of 4 types of tax—2 paid by the employer and 2 paid by the employee—that must be paid or withheld every pay period.
The 4 payroll tax types are:
- California State Unemployment Insurance Tax (CA SUI) paid by the employer
- California Employee Training Tax (CA ETT) paid by the employer
- California State Disability Insurance Tax (CA SDI) paid by the employee but withheld by the employer
- California Personal Income Tax (CA PIT) paid by the employee but withheld by the employer
We’ll go into these tax types in greater detail later. First, let’s look at some FAQs about California payroll tax.
What is the difference between payroll tax and income tax?
The employer and the employee share payroll tax burdens. The employee pays income tax. In both cases, the employer is responsible for withholding the appropriate funds.
Who must pay California payroll tax?
California state tax law holds that if you pay more than $100 in a single quarter to one or more employees, you must pay payroll taxes. This rule applies whether you run a for-profit or nonprofit organization. It also applies if you hire household help like a nanny.
When do I have to start paying payroll taxes?
What are the California payroll tax due dates?
You can find a table for payroll tax due dates on the EDD website for the state of California. This table also lists important due dates for other required taxpayer information throughout the calendar year. These dates include the submission deadline for the annual report of employees’ wages and withholdings and when to file your annual tax return.
Failure to submit payment on time may result in a penalty, so make sure to mark on your calendar when payments are due and file an extension if necessary.
Why do I have to pay payroll taxes?
This set of taxes provides the state government with funds to support programs like Social Security and Medicare. The funds are also used to provide for schools and other public services.
Can I avoid paying payroll taxes?
No. However, you can strategically reduce your taxes by hiring independent contractors rather than employees and paying for certain employee benefits in exchange for a reduction in base salary.
How do I submit payment for California payroll tax?
Taxes are collected by The California Employment Development Department of the State of California - not the IRS. Enroll in an account with the department to file. The department offers e-services for businesses to submit payment, or you can file by mail.
Now, let’s move into some specifics about each tax type.
The California state payroll tax types
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. The employer must manage tax withholding for all 4 types.
These taxes must be considered when calculating the true cost of an employee. It’s important to look beyond salary or hourly rate to taxes like these to determine if you are in a financial position to hire employees.
CA SUI: California State Unemployment Insurance Tax
This tax exists because of the State Unemployment Tax Act (SUTA). The funds are used to support those who become unemployed through no fault of their own. Those who quit their jobs are not eligible for these funds.
This tax is in addition to the federal unemployment tax employers must pay as part of the Federal Unemployment Tax Act (FUTA) of 1939.
CA ETT: California Employment Training Tax
This tax supports the growth of the California labor market. It funds training programs for workers in specific, targeted industries.
CA SDI: California State Disability Insurance Tax
You must withhold employee earnings for this tax. These tax funds provide funds to those who cannot work due to a non-work-related disability. The disability must be temporary to qualify.
This state fund also supports the Paid Family Leave program. This program covers those who take temporary leave to be at home with a new baby and caretakers who must leave work to be with their seriously ill loved ones. Other qualifying circumstances may also apply.
CA PIT: California Personal Income Tax
Anyone who makes money in California is subject to this tax. This means California residents and non-residents must pay CA PIT if they earn money in the state. These funds are collected by the government and are used for public services like infrastructure repairs, schools, health and human services, and more.
This personal income tax is not the same as the federal income tax. California collects an additional percentage of employees’ wages over and above the federal income tax. Some employees may qualify for an exemption which they may request when filling out Form W-4. With or without exemption, you as the employer are responsible for any income tax withholding for CA PIT.
Now that you know more about each payroll tax type, let’s look at how much you may be asked to pay as well as how to calculate payments.
How much will I owe in California payroll tax?
Each tax is calculated differently, and the tax rates change. Generally speaking, you are likely to pay no more than $500 per year per employee for CA ETT and CA SUI combined.
The employee will pay a maximum of around $1,600 for CA SDI. CA PIT is determined by salary or hourly rate and will likely vary from employee to employee.
Check with a tax professional to determine your exact rate for each tax and estimated tax responsibility.
How do I calculate my California employer payroll tax?
This can be complex, and it is important to get it right. You can hire a tax professional to help you, but here are a few steps to get you started if you want to take on payroll tax calculations yourself.
1) What are the taxable wages?
Knowing the amount of your employees’ wages eligible for each tax 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 your employees’ taxable wages.
2) Determine the CA UI rate and the ETT rate
New employers have a UI tax rate of 3.4% for their first couple of years in business. After that, the rates vary. Head to the EDD to determine your exact rate. You can also find information about your ETT rate there. Note that you may have to create an account to determine your exact rates for both.
3) Find the SDI rate
The CA SDI rate in 2022 is 1.1%. Deduct this amount from each employee's paycheck.
4) Calculate the PIT rate
Look to the California Employer’s Guide for 2022 and the California PIT withholding tables to find the current PIT rates. You will also find withholding schedules and other important information for all payroll tax types in this document.
Once you get into the habit of calculating and submitting payroll taxes, you’ll find it gets easier. It may never become your favorite activity, but proper withholding and payment of these taxes and following other California labor laws will serve your business well.
Payroll tax might be hard, but Huckleberry makes small business insurance easy
At Huckleberry, we’ve made it easy to get the small business insurance you need to protect your business and your employees in California. Learn more about workers’ compensation in California or grab a free estimate of how much you’re likely to pay for small business insurance coverage like general liability and commercial auto insurance.