As an employer, you must register your company with the state and begin withholding taxes from employee wages. The state of California has a variety of taxes that must be paid quarterly or annually, depending on the type of business entity. If you are starting a new job and will be receiving regular wages from your employer, it’s important for you to understand the different tax withholdings so you don’t get caught off-guard come tax season. This article covers general information about California employer taxes as well as more specific details on state unemployment insurance and workers’ compensation taxes. Read on to learn more.
California Employer Taxes
Employer taxes are the state and federal withholdings that are taken out of employee paychecks.
Depending on the type of business entity you operate, you may be required to pay a combination of state and federal taxes, as well as state-specific taxes. This includes unemployment insurance, workers’ compensation, and state and federal employment taxes. Employers in California must pay a state withholding tax, federal income tax, and state unemployment insurance (SUI). Employers running a payroll are also required to pay workers’ compensation insurance.
California Payroll Taxes
Many of the taxes that are paid by California employers are referred to as payroll taxes. Employers have to contribute 8.84% of the gross wages of each employee if the business operates in California. The gross wages are the amount of pay before any deductions such as for health insurance or 401(k) contributions have been taken out. The California payroll tax is sometimes referred to as the state withholding tax. The 8.84% payroll tax is divided into two parts. You must withhold 1.1% for state disability insurance and 2.2% of the gross pay for California’s unemployment insurance (UI). The 1.1% that you withhold for state disability insurance is deposited in a special fund that is used to pay disability benefits to state employees. The 2.2% that you withhold for UI is deposited in a special fund that is used to pay unemployment benefits to workers who lose their jobs.
State Unemployment Insurance (SUI) Tax
California employers are required to pay taxes to cover the possibility that an employee may become unemployed. This is referred to as the state unemployment insurance (SUI) tax, which is paid to the state’s unemployment insurance fund. Even though the state unemployment insurance tax is often collectively referred to as the payroll tax, it’s important to understand that the SUI tax is paid by the employer. The SUI tax is calculated based on a percentage of the gross wages of all full-time employees. California employers must pay a SUI tax rate of 2.2% of the gross wages of each employee. This is referred to as the SUI base rate. The SUI base rate is due and payable quarterly. The SUI base rate is calculated as a percentage of the first $7,000 in gross wages for each employee.
Workers’ Compensation Tax
The state of California requires that every employer who has employees complete a Workers’ Compensation Insurance Application with the California Division of Workers’ Compensation (DWC). The application enables the employer to obtain workers’ compensation insurance coverage. It also provides the DWC with information about the company and its employees, including their names, addresses, and social security numbers. The California workers’ compensation insurance tax is calculated based on the gross payroll of each employee. Employers must contribute a percentage of their gross payroll that varies depending on the type of business entity and the amount of the workers’ compensation insurance premium. If the gross payroll of an employee does not exceed $7,000, employers do not have to pay workers’ compensation insurance taxes for that employee.
Final Thoughts and What's Next?
As an employer, you are responsible for making sure each employee is paid a fair wage for the work they do. You also must withhold taxes from employee paychecks in accordance with state and federal guidelines. There are many taxes employers must pay, such as state and federal income taxes, state and federal employment taxes, and state unemployment insurance taxes. Understanding these taxes can help you make informed decisions when hiring new employees and planning payroll deductions. You can get more information at the CA EDD site.
Looking to have your payroll and payroll taxes handled for you? Band of Hands helps employers and small business owners remove the stresses of figuring out the complexities that come with payroll taxes. Band of Hands is a one-stop shop "HR in a Box" solution that handles everything from hiring, onboarding, payroll, payroll taxes, HR, compliance and more for one flat low fee.
Learn more at www.bandofhands.com/how-it-works