Payroll taxes in California are distinct from other parts of the country. It is one of many costs which extend beyond employee wages, and employers must know how to compute them, as well as what to contribute, withhold and the proper filing procedures. Below are the most important things you should know.
How California Payroll Taxes Work
Payroll taxes form a percentage of the income of each employee. Some are taken directly out of their paychecks while others must be paid for by their employer. Most employers are subject to these taxes after they’ve paid more than $100 to at least one employee within a single quarter. This is true for both profit and non-profit institutions.
Every business owner in California is required to provide information about new employees, which must be sent to the California New Employee Registry within the first twenty days of the employee being hired. Many employers do this by submitting a DE 34, or Report of New Employee form.
The Four Payroll Taxes For California
There are four types of payroll tax in California, which are the Employment Training Tax, California Personal Income Tax, State Disability Insurance and Unemployment Insurance. The employees must pay for these taxes, but their employer must withhold them, and the calculation for each tax is performed with different rates.
The Employment Training Tax was designed to promote growth in the labor market. Employers are subject to it starting during their first year in business and the rate is 0.1 percent for the initial $7,000 of wages which are paid to each worker, which would be $7. The California Income Tax is placed on the wages of all California residents along with non-residents who derive their income from the state. The Unemployment Insurance tax was established to support those who are unemployed.
Employers are responsible for paying this tax which is calculated based on the initial $7,000 an employee earns in income. The total amount paid will vary by employer but typically 3.4 percent is the amount payable by employers who have been in business for three years. State Disability Insurance is designed to support workers who are unable to work temporarily due to injury. It is taken out of employee wages and a percentage must be withheld out of the initial $106,742 an employee earns annually. Employees will pay a maximum of $960.68 each as of this writing.
Calculating The Taxes
Employers will first need to determine the wages which are taxable. This is critical as every other calculation will be based on it. Once you have this information you will next want to figure out the Unemployment Insurance Tax and Employee Training Tax. The current rates are available on the website for EDD. For the State Disability Insurance tax, you will need to withhold the existing rate, which as of 2016 is 0.9. The personal income tax can be calculated either by using the wage bracket approach or performing an exact calculation. Due to the complexity involved with this process, using online payroll software will help to perform many of the aforementioned tax procedures with ease.