How Payroll Taxes Work In California

How Payroll Taxes Work in California

Understanding payroll taxes is one of the first steps to becoming a compliant employer in California. Whether you’re hiring your first employee or expanding your startup team, this guide will walk you through everything you need to know — from the types of payroll taxes and who pays what, to registration, payment schedules, and filing requirements. Written in plain language, this article helps you grasp the essentials without any complex jargon, so you can focus on growing your business with confidence.

 

A Clear Guide for Startup Owners (No Jargon, No Stress)

If you’ve just launched a startup in California and are getting ready to hire your first employee, you’re not alone in asking:

“What are payroll taxes and how do I deal with them?”

Don’t worry — this guide is written just for you. We’ll explain how payroll taxes work in California in a simple, step-by-step way, with real examples and tools to help you get started. This is your go-to California payroll tax guide.

What Are Payroll Taxes?

Payroll taxes are money that gets taken out of your employee’s paycheck and additional money you pay as the employer. Both amounts go to the government — federal and state — to fund services like Social Security, healthcare, unemployment benefits, and disability insurance.

Two Levels of Payroll Taxes

When understanding how payroll taxes work in California, it’s important to know that taxes happen at two levels:

1. Federal Payroll Taxes – Same in every U.S. state
2. California State Payroll Taxes – Special rules just for California employers

 A Quick Table – Who Pays What?

Tax Name	Who Pays	What It’s For
Social Security	You + Employee	Retirement benefits
Medicare	You + Employee	Healthcare for seniors
FUTA (Federal Unemployment)	You	Helps unemployed workers
California UI (State Unemployment)	You	State-level unemployment support
SDI (State Disability Insurance)	Employee	Temporary disability and family leave
PIT (Personal Income Tax)	Employee	California state income tax
ETT (Employment Training Tax)	You	State job training programs

Let’s Break It Down (Tax by Tax)

Federal Taxes (Apply in all states)

1. Social Security Tax
   • 6.2% from employee’s pay
   • 6.2% from your business (you match it)
2. Medicare Tax
   • 1.45% from employee
   • 1.45% from employer
3. FUTA (Federal Unemployment)
   • You pay 6% on the first $7,000 of each employee’s annual pay
   • Most employers get a 5.4% credit, so you usually pay just 0.6%

California State Taxes

1. UI – Unemployment Insurance
   • Only you pay this
   • Rates range from 1.5% to 6.2%, depending on your business type
   • Applied only on the first $7,000 of wages
2. ETT – Employment Training Tax
   • 0.1% paid by you
   • Applies to the same wage base as UI
3. SDI – State Disability Insurance
   • Deducted from the employee’s paycheck
   • 0.9% as of 2025
   • Applies up to $153,164 of salary
4. PIT – Personal Income Tax
   • You withhold this from employee wages

• There is no set rate; it is determined by the employee’s W-4/DE 4 form and income.

Understanding all of these is key to meeting payroll tax requirements for startups in California.

How to Set Up Payroll – Step by Step

1. Register Your Business

• Get an EIN (Employer Identification Number) from the IRS → Apply here
• Register with California EDD for state-level payroll → Register here

2. Collect Employee Info

Make sure every new employee fills:

• Federal’s W-4 – For federal income tax
• California’s DE 4 – Regarding state income tax

3. Choose Payroll Software

Running payroll manually is risky. Tools like these make it easier:

• Gusto
• QuickBooks Payroll
• Zoho Payroll
• ADP

They handle calculations, tax filings, direct deposits, and reporting—helpful for startups managing payroll tax requirements in California.

4. Withhold & Pay Taxes

Each time you run payroll:

• Deduct the correct amount from employee pay
• Add your employer share
• Send payments to:
  • IRS (federal)
  • EDD (California state)

Tax payments are usually monthly or quarterly, depending on your payroll volume.

5. File Payroll Reports

To stay compliant, you must file forms regularly:

• Federal: Form 941 (quarterly), Form 940 (annually), W-2 (year-end)
• California: W-2, DE 34 (new hire report), and DE 9 and DE 9C (quarterly)

Example: What Does It Cost to Hire?

Let’s say you pay an employee $5,000/month:

• You deduct about $700 (for Social Security, Medicare, PIT, and SDI).
• You pay about $400 more as the employer
• Total cost to you = $5,400/month

This breakdown is why knowing how payroll taxes work in California is so crucial when hiring.

Common Mistakes to Avoid

1. Not Registering Before Hiring
   → Always register with IRS and EDD first
2. Missing Payroll Tax Deadlines
   → Use payroll software to set auto-reminders
3. Misclassifying Employees as Contractors
   → If you set hours and provide tools, they’re an employee
4. Not Reporting New Hires
   → You have only 20 days to submit DE 34 to EDD.
5. Not Keeping Payroll Records
   → Store all pay slips, filings, and reports for at least 4 years

Helpful Resources

• California EDD – Employer Services
• IRS – Get EIN
• Gusto Payroll
• QuickBooks Payroll
• ADP Payroll

Final Thoughts: Keep It Simple and Stay Compliant

To sum it up, here’s how payroll taxes work in California:

• Register early
• Use payroll tools
• Withhold the right amounts
• Pay on time
• File reports regularly

By following this guide, you’ll handle your payroll tax requirements for startups in California with ease. It’s not as hard as it seems—just take it one step at a time, and your business will stay fully compliant.

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