Part of your role as an employer is to collect, report and pay payroll taxes. It is highly critical to stay compliant with tax laws, as you may be personally liable for payroll taxes not reported or deposited as required by federal and state laws.
The best option is to keep yourself aware of the current payroll tax standards and legislation. Be sure to register and report on time, as well as verify that you contribute or withhold each of the required individual taxes.
Here we provide a basic overview of the California payroll tax landscape.
What are payroll taxes?
Payroll taxes are taxes paid by employees and employers through the standard payroll process. Employers may withhold tax from the employee’s salary and pay it to the government on their behalf, or contribute a certain amount dictated by the employee’s wages. The employee’s wage or salary determines the amount of payroll tax.
In the United States, there are both federal and state payroll taxes.
What are Federal payroll taxes?
On the federal level, the Internal Revenue Service (IRS) administers the payroll taxes. Federal payroll taxes include Social Security, Medicare, federal unemployment insurance and federal income tax withholding. Together, Social Security and Medicare taxes make up the Federal Insurance Contributions Act (FICA) tax.
The national government collects federal payroll taxes to fund dedicated programs such as Social Security, healthcare, unemployment compensation, and workers’ compensation.
Typically the taxable wage cap for Social Security is automatically modified each year depending on the increases in the national average wage. As of 2019, the Social Security tax is 5.2% on wages up to $132,900. On the other hand, the Medicare tax is 1.45% on all wages. However, when individual wages exceed $200,000 or married couples filing jointly exceed $250,000, an additional 0.9% Medicare tax withholding applies to the employee only.
For more information regarding federal employment taxes (i.e. Social Security and Medicare), visit the IRS website.
What are the California payroll taxes?
California has four state payroll taxes, all of which are administered by the Employment Development Department (EDD). These taxes are: 1) unemployment insurance (UI) tax, 2) employment training tax (ETT), 3) state disability insurance (SDI) tax, and 4) California personal income tax (PIT).
Generally, wages are subject to all four payroll taxes. However, there are some employment types that are not subject to payroll taxes and/or personal income tax withholding. For more information, please refer to the list courtesy of the California EDD.
1. Unemployment Insurance Tax (UI)
What is it?
Unemployment insurance taxes fund the program by the same name. The unemployment insurance program is a component of a national program administered and managed by the U.S. Department of Labor per the Social Security Act. At its core, the program issues temporary payments to individuals who are unemployed through no fault of their own.
In the state of California, employers are liable for UI taxes once they have paid more than $100 in wages within a single calendar year. California is unique in this sense, as many other states elect to follow either the federal rules for UI tax liability under the Federal Unemployment Tax Act (FUTA) or other very similar regulations.
What is the tax rate?
Employers pay the state unemployment insurance tax on each employee’s wages up to a maximum annual amount. In California this amount, known as the taxable wage limit, is stable at $7,000 per employee. While this has held steady over recent years, the number is subject to change.
Each year the state lawmakers determine the UI rate schedule and the amount of taxable wages. The UI rate is vulnerable to a maximum increase of 6.2% or a decrease to a minimum of 1.5%. When calculating the UI rate, lawmakers analyze the employer’s experience and the balance in the UI Fund. Therefore, the maximum UI tax amount is $434 per employee each year ($7,000 x 6.2%).
Please note that government entities and designated nonprofit employers can elect the reimbursable method of financing UI in which they reimburse the UI fund on a dollar-for-dollar basis for all benefits paid to their former employees.
2. Employment Training Tax (ETT)
What is it?
The Employment Training Tax provides funds to train employees in targeted industries, thereby increasing the competitiveness of California businesses. Overall, the ETT fund promotes a healthy labor market, encourages California businesses to invest in a skilled and productive workforce, and assists in the skill development for workers who directly produce or deliver goods or services.
What is the tax rate?
Like the UI tax, the ETT is an employer-paid tax. Employers are subject to pay 0.1% for ETT on the first $7,000 in wages paid to each employee in a single calendar year. A California statute sets the tax rate at 0.1% of all UI taxable wages for employers with positive UI reserve account balances and subject to section 977(c) of the California Unemployment Insurance Code (CUIC). Based on the statute and tax rate, the maximum ETT amount is $7 per employee per year ($7,000 x 0.1%).
3. State Disability Insurance Tax (SDI)
What is it?
State Disability Insurance Tax funds the State Disability Insurance (DI) program which provides temporary benefit payments to workers for non-work-related disabilities. DI benefits are available to eligible California workers who lose wages when they are unable to perform their regulatory or customary work due to non-work related illness or injury, pregnancy, or childbirth. SDI tax also facilitates Paid Family Leave (PFL) benefits. PFL provides benefits to individuals unable to work as they care for a seriously ill family member or bond with a new child.
What is the tax rate?
Unlike UI tax and ETT, payroll deductions from the employee’s wages fund the State Disability Insurance program. Employers withhold 1% of taxable wages for SDI on the first $118,371 in wages paid to each employee within the calendar year. Thus the maximum allowable tax is $1,183.71 per year ($118,371 x 1%).
4. California Personal Income Tax (PIT)
What is it?
California Personal Income Tax is determined on the income of California residents and those nonresidents who derive income within California. The EDD administers the reporting, collection and enforcement of PIT wage withholding. In addition, the Franchise Tax Board (FTB) and the EDD manage the California PIT program for the Governor as a means to offer necessary resources to California public services (e.g., schools, parks, roads, health and human services).
What is the tax rate?
California PIT is also an employee-paid tax. It is either withheld from the employee’s wages based on their Form W-4 or DE4, Employee’s Withholding Allowance Certificate, or based on the supplemental tax rates. Unlike the other three California payroll taxes, there is no maximum tax amount for California PIT.
How much does the employer pay for the California payroll tax?
Once an employee starts their first day of work in California, their employer has 20 days to report the information to the California New Employee Registry. You must also report any time you hire an independent contractor with a Form 1099.
Accordingly, the sum of the four individual payroll tax rates comprises the rate of the California payroll tax. Each individual tax has a unique rate depending on how much income the employee receives. Of these individual taxes, the employer and employee each pay for some.
The employer contributes payment for the UI tax and ETT. Comparably, employers withhold the SDI tax and PIT from the employee’s wages.
Who qualifies as an employer?
According to the California Tax Service Center, an employer is a person or legal entity who hires one or more persons to work for a wage or salary. Employers include sole proprietors, partnerships, corporations, S corporations, limited liability companies, limited liability partnerships, nonprofit organizations, associations, trusts, public entities, as well as state and federal agencies.
Conversely, private households, local college clubs and local fraternity and sorority chapters who employ workers to perform household activities are household employers.
How do employers register for California payroll tax accounts?
It is important to stay compliant with tax law. As an employer doing business in California, you must establish a California payroll tax account with the California Employment Development Department. However, you do not need to create an account until you have paid over $100 in wages to one or more employees in a single calendar quarter. Those quarters are as such:
- 1st quarter: January, February, March
- 2nd quarter: April, May, June
- 3rd quarter: July, August, September
- 4th quarter: October, November, December
On the other hand, a household employer must register with the EDD once they have paid $750 in cash wages to one or more employees in a calendar year.
How can we help?
State payroll is not a do-it-yourself type of task. While you can do your part by staying up-to-date on California labor laws and any changing tax regulations, it is best to call in someone who knows and understands the legislation like the back of their hand.
We at Squar Milner are here to help you stay compliant with California tax laws. Our team is diligent about thoroughly educating themselves on changing laws, understanding local tax code, and helping you find the best practices for your specific situation. Contact us today!
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.