How Much Do You Know About California Payroll Tax?
By Davis Clarkson , July 8 2021
Are you a new Californian business owner that wants to know more about the California payroll tax? There are almost 4 million small businesses in California. More than 90,000 small businesses based or operating there seem to shut down each year. This is mainly because these businesses don’t adhere to the tax laws in the state.
Each state has slightly different tax regulations and rules. Several tax laws exist in the Golden State, and becoming aware of them allows you to know their impact on your establishment. This is why the efficient management of payroll is crucial to long-term business success. Therefore, you need to ask questions such as:
What is the California payroll tax you are primarily responsible for? Is there a particular way to calculate your payroll taxes? Get answers to these questions – and more – by checking out this ultimate guide.
California Payroll Taxes: What are They and How Can You Calculate Liability?
Before defining California payroll tax, it is essential to know what payroll is. A payroll is a list that has all employees, their respective wages, as well as the deductions removed from the wages. Most small businesses or establishments nowadays use cloud-based apps or in-house software to efficiently streamline the entire process of paying staff and ensuring deductions are calculated correctly.
Deductions from wages generally cover everything your small business is expected to remit. So, what is a California payroll tax? In simple words, a payroll tax refers to the tax you pay on your employees’ wages. These taxes are usually used for funding programs such as Medicare, Social Security, unemployment compensation, etc.
As a business owner, you have to withhold these taxes from each employee's paycheck and then send them to the Internal Revenue Service (IRS) on their behalf. Payroll taxes are pretty different from income taxes. On the flip side, not every business has to pay California payroll tax. Employers only need to pay it if your business’s total wages significantly exceed your territory or state’s tax-free threshold amount.
However, according to the Small Business Administration, up to 99.2 percent of businesses in California are categorized as or referred to themselves as ‘small businesses.’ Every startup owner hopes to revolutionize the world and they all share one thing in common: California payroll taxes and they need to figure them out.
California payroll tax rates are usually calculated as a percentage of your employee’s income. An employer only becomes subject to payroll taxes after successfully paying over $100 to one or more employees within a calendar quarter. This is true if you run a business, an NGO (non-governmental organization), or hire the services of a nanny or housekeeper for your home.
Payroll tax, despite the name, is not a single tax but is used as a blanket or umbrella term that refers to all the taxes that must be paid on employees' wages. There are currently 4 types of California payroll taxes, namely:
Employment training tax
Unemployment insurance taxes
California personal income tax
State disability insurance tax
As a rule, California imposes all 4 taxes on wages. This implies that California payroll tax rates are the sum of the 4 individual payroll taxes. Each California tax rate is unique; some of the taxes are paid by employers, while employees pay a few. Here’s a quick breakdown of these taxes in California:
Employment Training Tax
California readily recognizes the profound value that comes with providing relevant training to employees. The employment training taxes give funding to organizations in specific industries so that employees can receive adequate training. Companies or businesses usually pay employment training taxes. The establishments primarily responsible for employment training taxes pay nothing more than 0.001 percent of the first $7,000 in wages paid to each employee within a year. Employers will not pay anything less than $7 per worker each year in employment training taxes.
Unemployment Insurance Tax
Another form of California payroll tax is Unemployment Insurance Tax. This is part of a federal program that the United States Department of Labor implemented. The Social Security Act enacted these taxes. Employees who suddenly become unemployed – due to one reason or the other such as layoffs, etc. – that is not the ultimate fault of the employee qualify for unemployment insurance.
This is where such employees will get a temporary income. A percentage of unemployment insurance tax – for tax-rated employers – is paid on the first $7,000 in wages, which will be paid to every employee within a year. Employees receive notifications of precisely how much they owe every 12th – i.e., December – of the year. However, unemployment insurance tax should not exceed $434 per employee in a particular year.
California Income Tax
California residents and non-residents – i.e., every individual that earns an income in California – is mandated to pay personal income tax. For this reason, personal income tax is usually withheld before an employee receives their paychecks. The amount of personal income tax withheld from an employee is based on that employee’s Form DE 4 or W-4.
In contrast to the state disability insurance tax, employment training tax, as well as unemployment insurance tax, has no cap on personal income tax. This means there is no maximum amount for the personal income tax. Personal income taxes are typically used to fund human services, schools, roads, health programs, and public parks, etc., among other public services in the Golden State.
State Disability Insurance Tax
State disability taxes are calculated somewhat differently from unemployment insurance taxes and employment training taxes. Organizations are usually required to keep back a specific percentage of state disability insurance, especially on the first $118,371 in wages that each employee earns within a year. The primary purpose of state disability insurance is to offer temporary payments to employees with disabilities that are not related to work.
This insurance also covers what is known as 'Paid Family Leave benefits. This provides payments to workers who have no choice but to take a leave of absence or time off from work in order to take care of a new baby or sick family member. As of 2019, the state disability insurance tax rate is just 1 percent of a worker’s state disability taxable earnings or wages. The California State Legislature calculates tax amounts every year.
Presently, the highest state disability insurance tax is up to $1,183.71 for every employee per year.
California Payroll Tax: Public Entities and Nonprofit Organizations
Payroll tax liabilities for public entities and not-for-profit organizations usually confuse many employers. For instance, non-profit-making organizations in California need to pay employment training taxes, unemployment insurance taxes, as well as state disability insurance taxes. They are also mandated to pay personal income tax withholding.
However, California does provide an exemption for 501(c)(3) not-for-profit entities. These nonprofit entities may decide to give back the total cost of unemployment insurance benefits paid to former workers to the Employment Development Department. Alternatively, the not-for-profit entities may decide to pay the exact sum or amount of unemployment taxes that commercial employers usually pay.
As regards public entities, they can go for either of the 2 options previously described to pay unemployment insurance. What’s more, public entities must legally withhold personal income tax. Public entities are not mandated to pay state disability insurance tax, though they may decide to pay it in specific situations.
Other Relevant Information You need to know About California Payroll Tax
One of the first things every business owner in California needs to know that it is mandated by law to submit quality information about new employees – within 20 days of their first day of work – to the California New Employee Registry. This can be done in any of the following avenues:
Submit a paper DE 34, which you can download online
Submit a ‘Report of New Employee(s) (DE 34)’ electronically via e-Services for Business page to the California Employment Development Department (EDD)
Submit a copy of the employees’ W-4 forms. You may also need to include additional information such as the employees’ start-of-work date, your Federal employer identification number (FEIN), and your California employer account number to the W-4.
You are also at liberty to create customized California payroll tax forms and ensure every piece of information highlighted above is included. Then mail the filled-out form to the EDD.
Calculating California Payroll Taxes
Most employees in California are usually paid by the hour, i.e., they receive hourly wages, especially for lower-end jobs. Those that are lucky to hold more prestigious positions are on an annual salary. If you intend to escape the system – which is not advisable – it simply implies that you are possibly engaged in some cash-in-hand, back-door exchanges.
In spite of any dodgy schemes, your take-home pay will be far less than the salary listed in your job contract. And why should this be, you ask? Several factors come into play. To give an instance, tax contributions and precisely how much you decide to put away into a retirement fund. Notwithstanding, this is all managed and calculated by the term ‘Payroll.’
Calculating payroll taxes is performed in different orders in other states and even countries. But when calculating California payroll taxes, the first thing to be considered – and remove the salary from – is your Social Security and Medicare. What you remove from your paycheck is known as FICA taxes. Social Security deducts approximately 6.2 percent of cash from your salary while up to 1.45 percent is removed for Medicare.
However, the amount removed as a tax depends significantly on your wage. For instance, let’s say you usually take home up to $200,000 per annum. You will be burdened with an additional charge of 0.9 percent to cover a Medicare Surtax. It must be noted that if you are self-employed, California State laws require you to pay a new tax, a whole new one. Be sure to check out different state stub requirements as well to be in the clear.
In spite of Social Security and Medicare taxes, you need to pay something above 15 percent, which covers employer and employee taxes. A few additional fees will make your wallet feel much lighter by the end of the month. These are things that affect Californians as well as other Americans. For example, several organizations also provide benefits that can be deducted from your bank account (voluntarily) as an 'extra contribution.'
For instance, the company may offer a different health insurance plan, which you will be required to pay for via an instant, automatic deduction from your pay. Take note that your bank account will not get a whiff of this amount of money since your organization will tax it from you before you smell it.
Getting caught up in payroll complexity as a small business owner in California is incredibly easy. However, you must not worry because lots of support is available. California offers several in-person payroll tax seminars that will effectively walk you through the entire process. And if you want even more personalized assistance or you have a challenge or two dealing with California payroll tax forms, rates, etc.,
Consulting a reputable tax attorney or professional may be worth your time. These specialists are intimately familiar with every rule and regulation about California payroll tax rates, the nuts and bolts of payroll taxes for businesses irrespective of the size, etc. Consulting will give you profound peace of mind as you will learn how to meet every California payroll tax requirement from time to time. If you work in California but live in another state, this article might just be for you. Find out all about living in one state and working in another.
If you have a need to prove your income or need to create paystubs for your employees, check out these paystub templates that make your life so much easier and payroll way more pleasant.